THE MANAGEMENT OF INNOVATION AND CHANGE SERIES
Michael L. Tushman and Andrew H. Van de Ven, Series Editors
Emerging Patterns of Innovation: Sources of Japan’s Technological Edge
Fumio Kodama, with a Foreword by Lewis M. Branscomb Crisis Renewal:
Meeting the Challenge of Organizational Change
David K. Hurst Winning through Innovation: A Practical Guide to Leading
Organizational
Change and Renewal
Michael L. Tushman
Charles A. O’Reilly III Imitation to Innovation: The Dynamics of Korea’s
Technological Learning
Linsu Kim The Innovator’s Dilemma: When New Technologies Cause Great
Firms to Fail
Clayton M. Christensen
Copyright
Copyright 1997, 2000 by the President and fellows of Harvard College All rights
reserved No part of this publication may be reproduced, stored in or introduced
into a retrieval system, or transmitted, in any form, or by any means (electronic,
mechanical, photocopying, recording, or otherwise), without the prior
permission of the publisher. Requests for permission should be directed to
permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business
School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
ISBN: 978-1-4221-9602-1
Contents
Copyright
In Gratitude
Introduction
PART ONE: WHY GREAT COMPANIES CAN FAIL
1 How Can Great Firms Fail? Insights from the Hard Disk Drive Industry
2 Value Networks and the Impetus to Innovate
3 Disruptive Technological Change in the Mechanical Excavator Industry
4 What Goes Up, Can’t Go Down
PART TWO: MANAGING DISRUPTIVE TECHNOLOGICAL CHANGE
5 Give Responsibility for Disruptive Technologies to Organizations Whose
Customers Need Them
6 Match the Size of the Organization to the Size of the Market
7 Discovering New and Emerging Markets
8 How to Appraise Your Organization’s Capabilities and Disabilities
9 Performance Provided, Market Demand, and the Product Life Cycle
10 Managing Disruptive Technological Change: A Case Study
11 The Dilemmas of Innovation: A Summary
The Innovator’s Dilemma Book Group Guide
About the Author
In Gratitude
Although this book lists only one author, in reality the ideas it molds together
were contributed and refined by many extraordinarily insightful and selfless
colleagues. The work began when Professors Kim Clark, Joseph Bower, Jay
Light, and John McArthur took the risk of admitting and financing a middleaged man’s way into and through the Harvard Business School’s doctoral
program in 1989. In addition to these mentors, Professors Richard Rosenbloom,
Howard Stevenson, Dorothy Leonard, Richard Walton, Bob Hayes, Steve
Wheelwright, and Kent Bowen helped throughout my doctoral research to keep
my thinking sharp and my standards for evidence high, and to embed what I was
learning within the streams of strong scholarship that had preceded what I was
attempting to research. None of these professors needed to spend so much of
their busy lives guiding me as they did, and I will be forever grateful for what
they taught me about the substance and process of scholarship.
I am similarly indebted to the many executives and employees of companies
in the disk drive industry who opened their memories and records to me as I
tried to understand what had driven them in the particular courses they had
taken. In particular, James Porter, editor of Disk/Trend Report, opened his
extraordinary archives of data, enabling me to measure what has happened in the
disk drive industry with a level of completeness and accuracy that could be done
in few other settings. The model of the industry’s evolution and revolution that
these men and women helped me construct has formed the theoretical backbone
for this book. I hope they find it to be a useful tool for making sense of their
past, and a helpful guide for some of their decisions in the future.
During my tenure on the Harvard Business School faculty, other colleagues
have helped refine this book’s ideas even more. Professors Rebecca Henderson
and James Utterback of MIT, Robert Burgelman of Stanford, and David Garvin,
Gary Pisano, and Marco Iansiti of the Harvard Business School have been
particularly helpful. Research associates Rebecca Voorheis, Greg Rogers, Bret
Baird, Jeremy Dann, Tara Donovan, and Michael Overdorf; editors Marjorie
Williams, Steve Prokesch, and Barbara Feinberg; and assistants Cheryl
Druckenmiller, Meredith Anderson, and Marguerite Dole, have likewise
contributed untold amounts of data, advice, insight, and work.
I am grateful to my students, with whom I have discussed and refined the
ideas put forward in this book. On most days I leave class wondering why I get
paid and why my students pay tuition, given that it is I who have learned the
most from our interactions. Every year they leave our school with their degrees
and scatter around the world, without understanding how much they have taught
their teachers. I love them and hope that those who come across this book will be
able to recognize in it the fruits of their puzzled looks, questions, comments, and
criticisms.
My deepest gratitude is to my family—my wife Christine and our children
Matthew, Ann, Michael, Spencer, and Catherine. With unhesitating faith and
support they encouraged me to pursue my lifelong dream to be a teacher, amidst
all of the demands of family life. Doing this research on disruptive technologies
has indeed been disruptive to them in terms of time and absence from home, and
I am forever grateful for their love and support. Christine, in particular, is the
smartest and most patient person I have known. Most of the ideas in this book
went home on some night over the past five years in half-baked condition and
returned to Harvard the next morning having been clarified, shaped, and edited
through my conversations with her. She is a great colleague, supporter, and
friend. I dedicate this book to her and our children.
Clayton M. Christensen
Harvard Business School
Boston, Massachusetts
April 1997
Introduction
This book is about the failure of companies to stay atop their industries when
they confront certain types of market and technological change. It’s not about
the failure of simply any company, but of good companies—the kinds that many
managers have admired and tried to emulate, the companies known for their
abilities to innovate and execute. Companies stumble for many reasons, of
course, among them bureaucracy, arrogance, tired executive blood, poor
planning, short-term investment horizons, inadequate skills and resources, and
just plain bad luck. But this book is not about companies with such weaknesses:
It is about well-managed companies that have their competitive antennae up,
listen astutely to their customers, invest aggressively in new technologies, and
yet still lose market dominance.
Such seemingly unaccountable failures happen in industries that move fast
and in those that move slow; in those built on electronics technology and those
built on chemical and mechanical technology; in manufacturing and in service
industries. Sears Roebuck, for example, was regarded for decades as one of the
most astutely managed retailers in the world. At its zenith Sears accounted for
more than 2 percent of all retail sales in the United States. It pioneered several
innovations critical to the success of today’s most admired retailers: for example,
supply chain management, store brands, catalogue retailing, and credit card
sales. The esteem in which Sears’ management was held shows in this 1964
excerpt from Fortune: “How did Sears do it? In a way, the most arresting aspect
of its story is that there was no gimmick. Sears opened no big bag of tricks, shot
off no skyrockets. Instead, it looked as though everybody in its organization
simply did the right thing, easily and naturally. And their cumulative effect was
to create an extraordinary powerhouse of a company.” 1
Yet no one speaks about Sears that way today. Somehow, it completely
missed the advent of discount retailing and home centers. In the midst of today’s
catalogue retailing boom, Sears has been driven from that business. Indeed, the
very viability of its retailing operations has been questioned. One commentator
has noted that “Sears’ Merchandise Group lost $1.3 billion (in 1992) even before
a $1.7 billion restructuring charge. Sears let arrogance blind it to basic changes
taking place in the American marketplace.” 2 Another writer has complained,
Sears has been a disappointment for investors who have watched its stock
sink dismally in the face of unkept promises of a turnaround. Sears’ old
merchandising approach—a vast, middle-of-the-road array of mid-priced
goods and services—is no longer competitive. No question, the constant
disappointments, the repeated predictions of a turnaround that never
seems to come, have reduced the credibility of Sears’ management in both
the financial and merchandising communities. 3
It is striking to note that Sears received its accolades at exactly the time—in
the mid-1960s—when it was ignoring the rise of discount retailing and home
centers, the lower-cost formats for marketing name-brand hard goods that
ultimately stripped Sears of its core franchise. Sears was praised as one of the
best-managed companies in the world at the very time it let Visa and MasterCard
usurp the enormous lead it had established in the use of credit cards in retailing.
In some industries this pattern of leadership failure has been repeated more
than once. Consider the computer industry. IBM dominated the mainframe
market but missed by years the emergence of minicomputers, which were
technologically much simpler than mainframes. In fact, no other major
manufacturer of mainframe computers became a significant player in the
minicomputer business. Digital Equipment Corporation created the
minicomputer market and was joined by a set of other aggressively managed
companies: Data General, Prime, Wang, Hewlett-Packard, and Nixdorf. But each
of these companies in turn missed the desktop personal computer market. It was
left to Apple Computer, together with Commodore, Tandy, and IBM’s standalone PC division, to create the personal-computing market. Apple, in particular,
was uniquely innovative in establishing the standard for user-friendly
computing. But Apple and IBM lagged five years behind the leaders in bringing
portable computers to market. Similarly, the firms that built the engineering
workstation market—Apollo, Sun, and Silicon Graphics—were all newcomers to
the industry.
As in retailing, many of these leading computer manufacturers were at one
time regarded as among the best-managed companies in the world and were held
up by journalists and scholars of management as examples for all to follow.
Consider this assessment of Digital Equipment, made in 1986: “Taking on
Digital Equipment Corp. these days is like standing in front of a moving train.
The $7.6 billion computer maker has been gathering speed while most rivals are
stalled in a slump in the computer industry.” 4 The author proceeded to warn
IBM to watch out, because it was standing on the tracks. Indeed, Digital was one
of the most prominently featured companies in the McKinsey study that led to
the book In Search of Excellence.5
Yet a few years later, writers characterized DEC quite differently:
Digital Equipment Corporation is a company in need of triage. Sales are
drying up in its key minicomputer line. A two-year-old restructuring plan
has failed miserably. Forecasting and production planning systems have
failed miserably. Cost-cutting hasn’t come close to restoring
profitability…. But the real misfortune may be DEC’s lost opportunities.
It has squandered two years trying halfway measures to respond to the
low-margin personal computers and workstations that have transformed
the computer industry. 6
In Digital’s case, as in Sears, the very decisions that led to its decline were
made at the time it was so widely regarded as being an astutely managed firm. It
was praised as a paragon of managerial excellence at the very time it was
ignoring the arrival of the desktop computers that besieged it a few years later.
Sears and Digital are in noteworthy company. Xerox long dominated the
market for plain paper photocopiers used in large, high-volume copying centers.
Yet it missed huge growth and profit opportunities in the market for small
tabletop photocopiers, where it became only a minor player. Although steel
minimills have now captured 40 percent of the North American steel market,
including nearly all of the region’s markets for bars, rods, and structural steel,
not a single integrated steel company— American, Asian, or European—had by
1995 built a plant using minimill technology. Of the thirty manufacturers of
cable-actuated power shovels, only four survived the industry’s twenty-five-year
transition to hydraulic excavation technology.
As we shall see, the list of leading companies that failed when confronted
with disruptive changes in technology and market structure is a long one. At first
with disruptive changes in technology and market structure is a long one. At first
glance, there seems to be no pattern in the changes that overtook them. In some
cases the new technologies swept through quickly; in others, the transition took
decades. In some, the new technologies were complex and expensive to develop.
In others, the deadly technologies were simple extensions of what the leading
companies already did better than anyone else. One theme common to all of
these failures, however, is that the decisions that led to failure were made when
the leaders in question were widely regarded as among the best companies in the
world.
There are two ways to resolve this paradox. One might be to conclude that
firms such as Digital, IBM, Apple, Sears, Xerox, and Bucyrus Erie must never
have been well managed. Maybe they were successful because of good luck and
fortuitous timing, rather than good management. Maybe they finally fell on hard
times because their good fortune ran out. Maybe. An alternative explanation,
however, is that these failed firms were as well-run as one could expect a firm
managed by mortals to be—but that there is something about the way decisions
get made in successful organizations that sows the seeds of eventual failure.
The research reported in this book supports this latter view: It shows that in
the cases of well-managed firms such as those cited above, good management
was the most powerful reason they failed to stay atop their industries. Precisely
because these firms listened to their customers, invested aggressively in new
technologies that would provide their customers more and better products of the
sort they wanted, and because they carefully studied market trends and
systematically allocated investment capital to innovations that promised the best
returns, they lost their positions of leadership.
What this implies at a deeper level is that many of what are now widely
accepted principles of good management are, in fact, only situationally
appropriate. There are times at which it is right not to listen to customers, right
to invest in developing lower-performance products that promise lower margins,
and right to aggressively pursue small, rather than substantial, markets. This
book derives a set of rules, from carefully designed research and analysis of
innovative successes and failures in the disk drive and other industries, that
managers can use to judge when the widely accepted principles of good
management should be followed and when alternative principles are appropriate.
These rules, which I call principles of disruptive innovation, show that when
good companies fail, it often has been because their managers either ignored
these principles or chose to fight them. Managers can be extraordinarily effective
in managing even the most difficult innovations if they work to understand and
harness the principles of disruptive innovation. As in many of life’s most
challenging endeavors, there is great value in coming to grips with “the way the
world works,” and in managing innovative efforts in ways that accommodate
such forces.
The Innovator’s Dilemma is intended to help a wide range of managers,
consultants, and academics in manufacturing and service businesses—high tech
or low—in slowly evolving or rapidly changing environments. Given that aim,
technology, as used in this book, means the processes by which an organization
transforms labor, capital, materials, and information into products and services
of greater value. All firms have technologies. A retailer like Sears employs a
particular technology to procure, present, sell, and deliver products to its
customers, while a discount warehouse retailer like PriceCostco employs a
different technology. This concept of technology therefore extends beyond
engineering and manufacturing to encompass a range of marketing, investment,
and managerial processes. Innovation refers to a change in one of these
technologies.
THE DILEMMA
To establish the theoretical depth of the ideas in this book, the breadth of their
usefulness, and their applicability to the future as well as the past, I have divided
this book into two parts. Part One, chapters 1 through 4, builds a framework that
explains why sound decisions by great managers can lead firms to failure. The
picture these chapters paint is truly that of an innovator’s dilemma: the logical,
competent decisions of management that are critical to the success of their
companies are also the reasons why they lose their positions of leadership. Part
Two, chapters 5 through 10, works to resolve the dilemma.
Building on our understanding of why and under what
circumstances new technologies have caused great firms
to fail, it prescribes managerial solutions to the dilemma
—how executives can simultaneously do what is right for
the near-term health of their established businesses, while
focusing adequate resources on the disruptive
technologies that ultimately could lead to their downfall.
Building a Failure Framework
I begin this book by digging deep before extending the discussion to draw
general conclusions. The first two chapters recount in some detail the history of
the disk drive industry, where the saga of “good-companies-hitting-hard-times”
has been played out over and over again. This industry is an ideal field for
studying failure because rich data about it exist and because, in the words of
Harvard Business School Dean Kim B. Clark, it is “fast history.” In just a few
years, market segments, companies, and technologies have emerged, matured,
and declined. Only twice in the six times that new architectural technologies
have emerged in this field has the industry’s dominant firm maintained its lead
in the subsequent generation. This repetitive pattern of failure in the disk drive
industry allowed me first to develop a preliminary framework that explained
why the best and largest firms in the early generations of this industry failed and
then to test this framework across subsequent cycles in the industry’s history to
see whether it was robust enough to continue to explain failures among the
industry’s more recent leaders.
Chapters 3 and 4 then deepen our understanding of why the leading firms
stumbled repeatedly in the disk drive industry and, simultaneously, test the
breadth of the framework’s usefulness by examining the failure of firms in
industries with very different characteristics. Hence, chapter 3, exploring the
mechanical excavator industry, finds that the same factors that precipitated the
failure of the leading disk drive makers also proved to be the undoing of the
leading makers of mechanical excavators, in an industry that moves with a very
different pace and technological intensity. Chapter 4 completes the framework
and uses it to show why integrated steel companies worldwide have proven so
incapable of blunting the attacks of the minimill steel makers.
WHY GOOD MANAGEMENT CAN LEAD TO FAILURE
The failure framework is built upon three findings from this study. The first is
that there is a strategically important distinction between what I call sustaining
technologies and those that are disruptive. These concepts are very different
from the incremental-versus-radical distinction that has characterized many
studies of this problem. Second, the pace of technological progress can, and
often does, outstrip what markets need. This means that the relevance and
competitiveness of different technological approaches can change with respect to
different markets over time. And third, customers and financial structures of
successful companies color heavily the sorts of investments that appear to be
attractive to them, relative to certain types of entering firms.
Sustaining versus Disruptive Technologies
Most new technologies foster improved product performance. I call these
sustaining technologies. Some sustaining technologies can be discontinuous or
radical in character, while others are of an incremental nature. What all
sustaining technologies have in common is that they improve the performance of
established products, along the dimensions of performance that mainstream
customers in major markets have historically valued. Most technological
advances in a given industry are sustaining in character. An important finding
revealed in this book is that rarely have even the most radically difficult
sustaining technologies precipitated the failure of leading firms.
Occasionally, however, disruptive technologies emerge: innovations that
result in worse product performance, at least in the near-term. Ironically, in each
of the instances studied in this book, it was disruptive technology that
precipitated the leading firms’ failure.
Disruptive technologies bring to a market a very different value proposition
than had been available previously. Generally, disruptive technologies
underperform established products in mainstream markets. But they have other
features that a few fringe (and generally new) customers value. Products based
on disruptive technologies are typically cheaper, simpler, smaller, and,
frequently, more convenient to use. There are many examples in addition to the
personal desktop computer and discount retailing examples cited above. Small
off-road motorcycles introduced in North America and Europe by Honda,
Kawasaki, and Yamaha were disruptive technologies relative to the powerful,
over-the-road cycles made by Harley-Davidson and BMW. Transistors were
disruptive technologies relative to vacuum tubes. Health maintenance
organizations were disruptive technologies to conventional health insurers. In the
near future, “internet appliances” may become disruptive technologies to
suppliers of personal computer hardware and software.
Trajectories of Market Need versus Technology Improvement
The second element of the failure framework, the observation that technologies
can progress faster than market demand, illustrated in Figure I.1, means that in
their efforts to provide better products than their competitors and earn higher
prices and margins, suppliers often “overshoot” their market: They give
customers more than they need or ultimately are willing to pay for. And more
importantly, it means that disruptive technologies that may underperform today,
relative to what users in the market demand, may be fully performancecompetitive in that same market tomorrow.
Many who once needed mainframe computers for their data processing
requirements, for example, no longer need or buy mainframes. Mainframe
performance has surpassed the requirements of many original customers, who
today find that much of what they need to do can be done on desktop machines
linked to file servers. In other words, the needs of many computer users have
increased more slowly than the rate of improvement provided by computer
designers. Similarly, many shoppers who in 1965 felt they had to shop at
department stores to be assured of quality and selection now satisfy those needs
quite well at Target and Wal-Mart.
Figure I.1 The Impact of Sustaining and Disruptive Technological Change
Disruptive Technologies versus Rational Investments
The last element of the failure framework, the conclusion by established
companies that investing aggressively in disruptive technologies is not a rational
financial decision for them to make, has three bases. First, disruptive products
are simpler and cheaper; they generally promise lower margins, not greater
profits. Second, disruptive technologies typically are first commercialized in
emerging or insignificant markets. And third, leading firms’ most profitable
customers generally don’t want, and indeed initially can’t use, products based on
disruptive technologies. By and large, a disruptive technology is initially
embraced by the least profitable customers in a market. Hence, most companies
with a practiced discipline of listening to their best customers and identifying
new products that promise greater profitability and growth are rarely able to
build a case for investing in disruptive technologies until it is too late.
TESTING THE FAILURE FRAMEWORK
This book defines the problem of disruptive technologies and describes how they
can be managed, taking care to establish what researchers call the internal and
external validity of its propositions. Chapters 1 and 2 develop the failure
framework in the context of the disk drive industry, and the initial pages of
chapters 4 through 8 return to that industry to build a progressively deeper
understanding of why disruptive technologies are such vexatious phenomena for
good managers to confront successfully. The reason for painting such a complete
picture of a single industry is to establish the internal validity of the failure
framework. If a framework or model cannot
reliably explain what happened within a single industry,
it cannot be applied to other situations with confidence.
Chapter 3 and the latter sections of chapters 4 through 9 are structured to
explore the external validity of the failure framework—the conditions in which
we might expect the framework to yield useful insights. Chapter 3 uses the
framework to examine why the leading makers of cable excavators were driven
from the earthmoving market by makers of hydraulic machines, and chapter 4
discusses why the world’s integrated steel makers have floundered in the face of
minimill technology. Chapter 5 uses the model to examine the success of
discount retailers, relative to conventional chain and department stores, and to
probe the impact
of disruptive technologies in the motor control and printer
industries. Chapter 6 examines the emerging personal
digital assistant industry and reviews how the electric
motor control industry was upended by disruptive
technology. Chapter 7 recounts how entrants using
disruptive technologies in motorcycles and logic circuitry
dethroned industry leaders; chapter 8 shows how and why
computer makers fell victim to disruption; and chapter 9
spotlights the same phenomena in the accounting
software and insulin businesses. Chapter 10 applies the
framework to a case study of the electric vehicle,
summarizing the lessons learned from the other industry
studies, showing how they can be used to assess the
opportunity and
threat of electric vehicles, and describing how they might
be applied to make an electric vehicle commercially
successful.
Chapter 11 summarizes the book’s findings.
Taken in sum, these chapters present a theoretically strong, broadly valid, and
managerially practical framework for understanding disruptive technologies and
how they have precipitated the fall from industry leadership of some of history’s
best-managed
companies.
HARNESSING THE PRINCIPLES OF DISRUPTIVE
INNOVATION
Colleagues who have read my academic papers reporting the findings recounted
in chapters 1 through 4 were struck by their near-fatalism. If good management
practice drives the failure of successful firms faced with disruptive technological
change, then the usual answers to companies’ problems—planning better,
working harder, becoming more customer-driven, and taking a longer-term
perspective—all exacerbate the problem. Sound execution, speed-to-market,
total quality management, and process reengineering are similarly ineffective.
Needless to say, this is disquieting news to people who teach future managers!
Chapters 5 through 10, however, suggest that although the solution to
disruptive technologies cannot be found in the standard tool kit of good
management, there are, in fact, sensible ways to deal effectively with this
challenge. Every company in every industry works under certain forces—laws of
organizational nature—that act powerfully to define what that company can and
cannot do. Managers faced with disruptive technologies fail their companies
when these forces overpower them.
By analogy, the ancients who attempted to fly by strapping feathered wings
to their arms and flapping with all their might as they leapt from high places
invariably failed. Despite their dreams and hard work, they were fighting against
some very powerful forces of nature. No one could be strong enough to win this
fight. Flight became possible only after people came to understand the relevant
natural laws and principles that defined how the world worked: the law of
gravity, Bernoulli’s principle, and the concepts of lift, drag, and resistance.
When people then designed flying systems that recognized or harnessed the
power of these laws and principles, rather than fighting them, they were finally
able to fly to heights and distances that were previously unimaginable.
The objective of chapters 5 through 10 is to propose the existence of five
laws or principles of disruptive technology. As in the analogy with manned
flight, these laws are so strong that managers who ignore or fight them are nearly
powerless to pilot their companies through a disruptive technology storm. These
chapters show, however, that if managers can understand and harness these
forces, rather than fight them, they can in fact succeed spectacularly when
confronted with disruptive technological change. I am particularly anxious that
managers read these chapters for understanding, rather than for simple answers.
I am very confident that the great managers about whom this book is written will
be very capable on their own of finding the answers that best fit their
circumstances. But they must first understand what has caused those
circumstances and what forces will affect the feasibility of their solutions. The
following paragraphs summarize these principles and what managers can do to
harness or accommodate them.
Principle #1: Companies Depend on Customers and Investors for
Resources
The history of the disk drive industry shows that the established firms stayed
atop wave after wave of sustaining technologies (technologies that their
customers needed), while consistently stumbling over simpler disruptive ones.
This evidence supports the theory of resource dependence.7 Chapter 5
summarizes this theory, which states that while managers may think they control
the flow of resources in their firms, in the end it is really customers and investors
who dictate how money will be spent because companies with investment
patterns that don’t satisfy their customers and investors don’t survive. The
highest-performing companies, in fact, are those that are the best at this, that is,
they have well-developed systems for
killing ideas that their customers don’t want. As a result,
these companies find it very difficult to invest adequate
resources in disruptive
technologies—lower-margin opportunities that their
customers don’t want—until their customers want them.
And by then it is too late.
Chapter 5 suggests a way for managers to align or harness this law with their
efforts to confront disruptive technology. With few exceptions, the only
instances in which mainstream firms have successfully established a timely
position in a disruptive technology were those in which the firms’ managers set
up an autonomous organization charged with building a new and independent
business around the disruptive technology. Such organizations, free of the power
of the customers of the mainstream company, ensconce themselves among a
different set of customers—those who want the products of the disruptive
technology. In other words, companies can succeed in disruptive technologies
when their managers align their organizations with the forces of resource
dependence, rather than ignoring or fighting them.
The implication of this principle for managers is that, when faced with a
threatening disruptive technology, people and processes in a mainstream
organization cannot be expected to allocate freely the critical financial and
human resources needed to carve out a strong position in the small, emerging
market. It is very difficult for a company whose cost structure is tailored to
compete in high-end markets to be profitable in low-end markets as well.
Creating an independent organization, with a cost structure honed to achieve
profitability at the low margins characteristic of most disruptive technologies, is
the only viable way for established firms to harness this principle.
Principle #2: Small Markets Don’t Solve the Growth Needs of
Large Companies
Disruptive technologies typically enable new markets to emerge. There is strong
evidence showing that companies entering these emerging markets early have
significant first-mover advantages over later entrants. And yet, as these
companies succeed and grow larger, it becomes progressively more difficult for
them to enter the even newer small markets destined to become the large ones of
the future.
To maintain their share prices and create internal opportunities for employees
to extend the scope of their responsibilities, successful companies need to
continue to grow. But while a $40 million company needs to find just $8 million
in revenues to grow at 20 percent in the subsequent year, a $4 billion company
needs to find $800 million in new sales. No new markets are that large. As a
consequence, the larger and more successful an organization becomes, the
weaker the argument that emerging markets can remain useful engines for
growth.
Many large companies adopt a strategy of waiting until new markets are
“large enough to be interesting.” But the evidence presented in chapter 6 shows
why this is not often a successful strategy.
Those large established firms that have successfully seized strong positions in
the new markets enabled by disruptive technologies have done so by giving
responsibility to commercialize the disruptive technology to an organization
whose size matched the size of the targeted market. Small organizations can
most easily respond to the opportunities for growth in a small market. The
evidence is strong that formal and informal resource allocation processes make it
very difficult for large organizations to focus adequate energy and talent on
small markets, even when logic says they might be big someday.
Principle #3: Markets that Don’t Exist Can’t Be Analyzed
Sound market research and good planning followed by execution according to
plan are hallmarks of good management. When applied to sustaining
technological innovation, these practices are invaluable; they are the primary
reason, in fact, why established firms led in every single instance of sustaining
innovation in the history of the disk drive industry. Such reasoned approaches
are feasible in dealing with sustaining technology because the size and growth
rates of the markets are generally known, trajectories of technological progress
have been established, and the needs of leading customers have usually been
well articulated. Because the vast majority of innovations are sustaining in
character, most executives have learned to manage innovation in a sustaining
context, where analysis and planning were feasible.
In dealing with disruptive technologies leading to new markets, however,
market researchers and business planners have consistently dismal records. In
fact, based upon the evidence from the disk drive, motorcycle, and
microprocessor industries, reviewed in chapter 7, the only thing we may know
for sure when we read experts’ forecasts about how large emerging markets will
become is that they are wrong.
In many instances, leadership in sustaining innovations—about which
information is known and for which plans can be made—is not competitively
important. In such cases, technology followers do about as well as technology
leaders. It is in disruptive innovations, where we know least about the market,
that there are such strong first-mover advantages. This is the innovator’s
dilemma.
Companies whose investment processes demand quantification of market
sizes and financial returns before they can enter a market get paralyzed or make
serious mistakes when faced with disruptive technologies. They demand market
data when none exists and make judgments based upon financial projections
when neither revenues or costs can, in fact, be known. Using planning and
marketing techniques that were developed to manage sustaining technologies in
the very different context of disruptive ones is an exercise in flapping wings.
Chapter 7 discusses a different approach to strategy and planning that
recognizes the law that the right markets, and the right strategy for exploiting
them, cannot be known in advance. Called discovery-based planning, it suggests
that managers assume that forecasts are wrong, rather than right, and that the
strategy they have chosen to pursue may likewise be wrong. Investing and
managing under such assumptions drives managers to develop plans for learning
what needs to be known, a much more effective way to confront disruptive
technologies successfully.
Principle #4: An Organization’s Capabilities Define Its Disabilities
When managers tackle an innovation problem, they instinctively work to assign
capable people to the job. But once they’ve found the right people, too many
managers then assume that the organization in which they’ll work will also be
capable of succeeding at the task. And that is dangerous—because organizations
have capabilities that exist independently of the people who work within them.
An organization’s capabilities reside in two places. The first is in its processes—
the methods by which people have learned to transform inputs of labor, energy,
materials, information, cash, and technology into outputs of higher value. The
second is in the organization’s values, which are the criteria that managers and
employees in the organization use when making prioritization decisions. People
are quite flexible, in that they can be trained to succeed at quite different things.
An employee of IBM, for example, can quite readily change the way he or she
works, in order to work successfully in a small start-up company. But processes
and values are not flexible. A process that is effective at managing the design of
a minicomputer, for example, would be ineffective at managing the design of a
desktop personal computer.
Similarly, values that cause employees to prioritize
projects to develop high-margin products, cannot
simultaneously accord priority to low-margin products.
The very processes and values that constitute an
organization’s capabilities in one context, define its
disabilities in another context.
Chapter 8 will present a framework that can help a manager understand
precisely where in his or her organization its capabilities and disabilities reside.
Drawing on studies in the disk drive and computer industries, it offers tools that
managers can use to create new capabilities, when the processes and values of
the present organization would render it incapable of successfully addressing a
new problem.
Principle #5: Technology Supply May Not Equal Market Demand
Disruptive technologies, though they initially can only be used in small markets
remote from the mainstream, are disruptive because they subsequently can
become fully performance-competitive within the mainstream market against
established products. As depicted in Figure I.1 (on page xvi), this happens
because the pace of technological progress in products frequently exceeds the
rate of performance improvement that mainstream customers demand or can
absorb. As a consequence, products whose features and functionality closely
match market needs today often follow a trajectory of improvement by which
they overshoot mainstream market needs tomorrow. And products that seriously
underperform today, relative to customer expectations in mainstream markets,
may become directly performance-competitive tomorrow.
Chapter 9 shows that when this happens, in markets as diverse as disk drives,
accounting software, and diabetes care, the basis of competition— the criteria by
which customers choose one product over another— changes. When the
performance of two or more competing products has improved beyond what the
market demands, customers can no longer base their choice upon which is the
higher performing product. The basis of product choice often evolves from
functionality to reliability, then to convenience, and, ultimately, to price.
Many students of business have described phases of the product life cycle in
various ways. But chapter 9 proposes that the phenomenon in which product
performance overshoots market demands is the primary mechanism driving
shifts in the phases of the product life cycle.
In their efforts to stay ahead by developing competitively superior products,
many companies don’t realize the speed at which they are moving up-market,
over-satisfying the needs of their original customers as they race the competition
toward higher-performance, higher-margin markets. In doing so, they create a
vacuum at lower price points into which competitors employing disruptive
technologies can enter. Only those companies that carefully measure trends in
how their mainstream customers use their products can catch the points at which
the basis of competition will change in the markets they serve.
LESSONS FOR SPOTTING DISRUPTIVE THREATS AND
OPPORTUNITIES
Some managers and researchers familiar with these ideas have arrived at this
point in the story in an anxious state because the evidence is very strong that
even the best managers have stumbled badly when their markets were invaded
by disruptive technologies. Most urgently, they want to know whether their own
businesses are targets for an attacking disruptive technologist and how they can
defend their business against such an attack before it is too late. Others,
interested in finding entrepreneurial opportunities, wonder how they can identify
potentially disruptive technologies around which new companies and markets
can be built.
Chapter 10 addresses these questions in a rather unconventional way. Rather
than offering a checklist of questions to ask or analyses to perform, it creates a
case study of a particularly vexing but well-known problem in technological
innovation: the electric vehicle. Positioning myself in the role of protagonist—as
the program manager responsible for electric vehicle development in a major
automobile manufacturing company wrestling with the mandate of the California
Air Resources Board to begin selling electric vehicles in that state—I explore the
question of whether electric vehicles are in fact a disruptive technology and then
suggest ways to organize this program, set its strategy, and manage it to succeed.
In the spirit of all case studies, the purpose of this chapter is not to advance what
I believe to be the correct answer to this innovator’s challenge. Rather, it
suggests a methodology and a way of thinking about the problem of managing
disruptive technological change that should prove useful in many other contexts.
Chapter 10 thus takes us deeply into the innovator’s dilemma that “good”
companies often begin their descent into failure by aggressively investing in the
products and services that their most profitable customers want. No automotive
company is currently threatened by electric cars, and none contemplates a
wholesale leap into that arena. The automobile industry is healthy. Gasoline
engines have never been more reliable. Never before has such high performance
and quality been available at such low prices. Indeed, aside from governmental
mandates, there is no reason why we should expect the established car makers to
pursue electric vehicles.
Established Technology
Disruptive Technology
Silver halide photographic film
Digital photography
Wireline telephony
Mobile telephony
Circuit-switched telecommunications networks
Packet-switched communications networks
Notebook computers
Hand-held digital appliances
Desktop personal computers
Sony Playstation II, Internet appliances
Full-service stock brokerage
On-line stock brokerage
New York & NASDAQ stock exchanges
Electronic Communications Networks (ECNs)
Full-fee underwriting of new equity and debt
issues
Dutch auctions of new equity and debt
issues, conducted on the Internet
Credit decisions based upon the personal
judgment of bank lending officers
Automated lending decisions based upon
credit scoring systems
Bricks & mortar retailing
On-line retailing
Industrial materials distributors
Internet-based sites such as Chemdex and Esteel
Printed greeting cards
Free greeting cards, downloadable over the
Internet
Electric utility companies
Distributed power generation (gas turbines,
micro-turbines, fuel cells)
Graduate schools of management
Corporate universities and in-house
management training programs
Classroom and campus-based instruction
Distance education, typically enabled by the
Internet
Standard textbooks
Custom-assembled, modular digital textbooks
Offset printing
Digital printing
Manned fighter and bomber aircraft
Unmanned aircraft
Microsoft Windows operating systems and
applications software written in C++.
Internet Protocols (IP), and Java software
protocols
Medical doctors
Nurse practitioners
General hospitals
Outpatient clinics and in-home patient care
Open surgery
Arthroscopic and endoscopic surgery
Cardiac bypass surgery
Angioplasty
Magnetic resonance imaging (MRI) and
Computer Tomography (CT) Scanning
Ultrasound—initially floor-standing machines,
ultimately portable machines
But the electric car is a disruptive technology and potential future threat. The
innovator’s task is to ensure that this innovation—the disruptive technology that
doesn’t make sense—is taken seriously within the company without putting at
risk the needs of present customers who provide profit and growth. As chapter
10 concretely lays out, the problem can be resolved only when new markets are
considered and carefully developed around new definitions of value—and when
responsibility for building the business is placed within a focused organization
whose size and interest are carefully aligned with the unique needs of the
market’s customers.
WHERE DISRUPTIONS ARE HAPPENING TODAY
One of the most gratifying aspects of my life since the first edition of The
Innovator’s Dilemma was published has been the number of people who have
called, representing industries that I had never thought about, who have
suggested that forces similar to those historical examples I described in these
pages are disrupting their industries as well. Some of these are described in the
table on the previous page. Not surprisingly, the Internet looms as an
infrastructural technology that is enabling the disruption of many industries.
Each of the innovations in the right column—in the form of a new
technology or a new business model—is now in the process of disrupting the
established order described in the left column. Will the companies that currently
lead their industries using the technologies in the left column survive these
attacks? My hope is that the future might be different than the past. I believe that
the future can be different, if managers will recognize these disruptions for what
they are, and address them in a way that accounts for or harnesses the
fundamental principles described in the pages that follow.
NOTES
1. John McDonald, “Sears Makes It Look Easy,” Fortune, May, 1964, 120–121.
2. Zina Moukheiber, “Our Competitive Advantage,” Forbes, April 12, 1993, 59.
3. Steve Weiner, “It’s Not Over Until It’s Over,” Forbes, May 28, 1990, 58.
4. Business Week, March 24, 1986, 98.
5. Thomas J. Peters and Robert H. Waterman, In Search of Excellence (New
York: Harper & Row, 1982).
6. Business Week, May 9, 1994, 26.
7. Jeffrey Pfeffer and Gerald R. Salancik, The External Control of
Organizations: A Resource Dependence Perspective (New York: Harper &
Row, 1978).
Part One
WHY GREAT COMPANIES
CAN FAIL
CHAPTER ONE
How Can Great Firms Fail? Insights from the
Hard Disk Drive Industry
When I began my search for an answer to the puzzle of why the best firms
can fail, a friend offered some sage advice. “Those who study genetics avoid
studying humans,” he noted. “Because new generations come along only every
thirty years or so, it takes a long time to understand the cause and effect of any
changes. Instead, they study fruit flies, because they are conceived, born, mature,
and die all within a single day. If you want to understand why something
happens in business, study the disk drive industry. Those companies are the
closest things to fruit flies that the business world will ever see.”
Indeed, nowhere in the history of business has there been an industry like
disk drives, where changes in technology, market structure, global scope, and
vertical integration have been so pervasive, rapid, and unrelenting. While this
pace and complexity might be a nightmare for managers, my friend was right
about its being fertile ground for research. Few industries offer researchers the
same opportunities for developing theories about how different types of change
cause certain types of firms to succeed or fail or for testing those theories as the
industry repeats its cycles of change.
This chapter summarizes the history of the disk drive industry in all its
complexity. Some readers will be interested in it for the sake of history itself. 1
But the value of understanding this history is that out of its complexity emerge a
few stunningly simple and consistent factors that have repeatedly determined the
success and failure of the industry’s best firms. Simply put, when the best firms
succeeded, they did so because they listened responsively to their customers and
invested aggressively in the technology, products, and manufacturing
capabilities that satisfied their customers’ next-generation needs. But,
paradoxically, when the best firms subsequently failed, it was for the same
reasons—they listened responsively to their customers and invested aggressively
in the technology, products, and manufacturing capabilities that satisfied their
customers’ next-generation needs. This is one of the innovator’s dilemmas:
Blindly following the maxim that good managers should keep close to their
customers can sometimes be a fatal mistake.
The history of the disk drive industry provides a framework for
understanding when “keeping close to your customers” is good advice—and
when it is not. The robustness of this framework could only be explored by
researching the industry’s history in careful detail. Some of that detail is
recounted here, and elsewhere in this book, in the hope that readers who are
immersed in the detail of their own industries will be better able to recognize
how similar patterns have affected their own fortunes and those of their
competitors.
HOW DISK DRIVES WORK
Disk drives write and read information that computers use. They comprise readwrite heads mounted at the end of an arm that swings over the surface of a
rotating disk in much the same way that a phonograph needle and arm reach over
a record; aluminum or glass disks coated with magnetic material; at least two
electric motors, a spin motor that drives the rotation of the disks and an actuator
motor that moves the head to the desired position over the disk; and a variety of
electronic circuits that control the drive’s operation and its interface with the
computer. See Figure 1.1 for an illustration of a typical disk drive.
The read-write head is a tiny electromagnet whose polarity changes whenever
the direction of the electrical current running through it changes. Because
opposite magnetic poles attract, when the polarity of the head becomes positive,
the polarity of the area on the disk beneath the head switches to negative, and
vice versa. By rapidly changing the direction of current flowing through the
head’s electromagnet as the disk spins beneath the head, a sequence of positively
and negatively oriented magnetic domains are created in concentric tracks on the
disk’s surface. Disk drives can use the positive and negative domains on the disk
as a binary numeric system—1 and 0—to “write” information onto disks. Drives
read information from disks in essentially the opposite process: Changes in the
magnetic flux fields on the disk surface induce changes in the micro current
flowing through the head.
Figure 1.1 Primary Components of a Typical Disk Drive
EMERGENCE OF THE EARLIEST DISK DRIVES
A team of researchers at IBM’s San Jose research laboratories developed the
first disk drive between 1952 and 1956. Named RAMAC (for Random Access
Method for Accounting and Control), this drive was the size of a large
refrigerator, incorporated fifty twenty-four-inch disks, and could store 5
megabytes (MB) of information (see Figure 1.2). Most of the fundamental
architectural concepts and component technologies that defined today’s
dominant disk drive design were also developed at IBM. These include its
removable packs of rigid disks (introduced in 1961); the floppy disk drive
(1971); and the Winchester architecture (1973). All had a powerful, defining
influence on the way engineers in the rest of the industry defined what disk
drives were and what they could do.
Figure 1.2 The First Disk Drive, Developed by IBM
Source: Courtesy of International Business Machines Corporation.
As IBM produced drives to meet its own needs, an independent disk drive
industry emerged serving two distinct markets. A few firms developed the plugcompatible market (PCM) in the 1960s, selling souped-up copies of IBM drives
directly to IBM customers at discount prices. Although most of IBM’s
competitors in computers (for example, Control Data, Burroughs, and Univac)
were integrated vertically into the manufacture of their own disk drives, the
emergence in the 1970s of smaller, nonintegrated computer makers such as
Nixdorf, Wang, and Prime spawned an original equipment market (OEM) for
disk drives as well. By 1976 about $1 billion worth of disk drives were
produced, of which captive production accounted for 50 percent and PCM and
OEM for about 25 percent each.
The next dozen years unfolded a remarkable story of rapid growth, market
turbulence, and technology-driven performance improvements. The value of
drives produced rose to about $18 billion by 1995. By the mid-1980s the PCM
market had become insignificant, while OEM output grew to represent about
three-fourths of world production. Of the seventeen firms populating the
industry in 1976—all of which were relatively large, diversified corporations
such as Diablo, Ampex, Memorex, EMM, and Control Data—all except IBM’s
disk drive operation had failed or had been acquired by 1995. During this period
an additional 129 firms entered the industry, and 109 of those also failed. Aside
from IBM, Fujitsu, Hitachi, and NEC, all of the producers remaining by 1996
had entered the industry as start-ups after 1976.
Some have attributed the high mortality rate among the integrated firms that
created the industry to its nearly unfathomable pace of technological change.
Indeed, the pace of change has been breathtaking. The number of megabits (Mb)
of information that the industry’s engineers have been able to pack into a square
inch of disk surface has increased by 35 percent per year, on average, from 50
Kb in 1967 to 1.7 Mb in 1973, 12 Mb in 1981, and 1100 Mb by 1995. The
physical size of the drives was reduced at a similar pace: The smallest available
20 MB drive shrank from 800 cubic inches (in. 3 ) in 1978 to 1.4 in. 3 by 1993—
a 35 percent annual rate of reduction.
Figure 1.3 shows that the slope of the industry’s experience curve (which
correlates the cumulative number of terabytes (one thousand gigabytes) of disk
storage capacity shipped in the industry’s history to the constant-dollar price per
megabyte of memory) was 53 percent—meaning that with each doubling of
cumulative terabytes shipped, cost per megabyte fell to 53 percent of its former
level. This is a much steeper rate of price decline than the 70 percent slope
observed in the markets for most other microelectronics products. The price per
megabyte has declined at about 5 percent per quarter for more than twenty
years.
THE IMPACT OF TECHNOLOGICAL CHANGE
My investigation into why leading firms found it so difficult to stay atop the disk
drive industry led me to develop the “technology mudslide hypothesis”: Coping
with the relentless onslaught of technology change was akin to trying to climb a
mudslide raging down a hill. You have to scramble with everything you’ve got
to stay on top of it, and if you ever once stop to catch your breath, you get
buried.
Figure 1.3 Disk Drive Price Experience Curve
Source: Data are from various issues of Disk/Trend Report.
To test this hypothesis, I assembled and analyzed a database consisting of the
technical and performance specifications of every model of disk drive introduced
by every company in the world disk drive industry for each of the years between
1975 and 1994. 2 This database enabled me to identify the firms that led in
introducing each new technology; to trace how new technologies were diffused
through the industry over time; to see which firms led and which lagged; and to
measure the impact each technological innovation had on capacity, speed, and
other parameters of disk drive performance. By carefully reconstructing the
history of each technological change in the industry, the changes that catapulted
entrants to success or that precipitated the failure of established leaders could be
identified.
This study led me to a very different view of technology change than the
work of prior scholars on this question had led me to expect. Essentially, it
revealed that neither the pace nor the difficulty of technological change lay at the
root of the leading firms’ failures. The technology mudslide hypothesis was
wrong.
The manufacturers of most products have established a trajectory of
performance improvement over time. 3 Intel, for example, pushed the speed of
its microprocessors ahead by about 20 percent per year, from its 8 megahertz
(MHz) 8088 processor in 1979 to its 133 MHz Pentium chip in 1994. Eli Lilly
and Company improved the purity of its insulin from 50,000 impure parts per
million (ppm) in 1925 to 10 ppm in 1980, a 14 percent annual rate of
improvement. When a measurable trajectory of improvement has been
established, determining whether a new technology is likely to improve a
product’s performance relative to earlier products is an unambiguous question.
But in other cases, the impact of technological change is quite different. For
instance, is a notebook computer better than a mainframe? This is an ambiguous
question because the notebook computer established a completely new
performance trajectory, with a definition of performance that differs
substantially from the way mainframe performance is measured. Notebooks, as a
consequence, are generally sold for very different uses.
This study of technological change over the history of the disk drive industry
revealed two types of technology change, each with very different effects on the
industry’s leaders. Technologies of the first sort sustained the industry’s rate of
improvement in product performance (total capacity and recording density were
the two most common measures) and ranged in difficulty from incremental to
radical. The industry’s dominant firms always led in developing and adopting
these technologies. By contrast, innovations of the second sort disrupted or
redefined performance trajectories—and consistently resulted in the failure of
the industry’s leading firms. 4
The remainder of this chapter illustrates the distinction between sustaining
and disruptive technologies by describing prominent examples of each and
summarizing the role these played in the industry’s development. This
discussion focuses on differences in how established firms came to lead or lag in
developing and adopting new technologies, compared with entrant firms. To
arrive at these examples, each new technology in the industry was examined. In
analyzing which firms led and lagged at each of these points of change, I defined
established firms to be those that had been established in the industry prior to the
advent of the technology in question, practicing the prior technology. I defined
entrant firms as those that were new to the industry at that point of technology
change. Hence, a given firm would be considered an entrant at one specific point
in the industry’s history, for example, at the emergence of the 8-inch drive. Yet
the same firm would be considered an established firm when technologies that
emerged subsequent to the firm’s entry were studied.
SUSTAINING TECHNOLOGICAL CHANGES
In the history of the disk drive industry, most technology changes have sustained
or reinforced established trajectories of product performance improvement.
Figure 1.4, which compares the average recording density of drives that
employed successive generations of head and disk technologies, maps an
example of this. The first curve plots the density of drives that used conventional
particulate oxide disk technology and ferrite head technology; the second charts
the average density of drives that used new-technology thin-film heads and
disks; the third marks the improvements in density achievable with the latest
head technology, magneto-resistive heads. 5
The way such new technologies as these emerge to surpass the performance
of the old resembles a series of intersecting technology S-curves. 6 Movement
along a given S-curve is generally the result of incremental improvements within
an existing technological approach, whereas jumping onto the next technology
curve implies adopting a radically new technology. In the cases measured in
Figure 1.4, incremental advances, such as grinding the ferrite heads to finer,
more precise dimensions and using smaller and more finely dispersed oxide
particles on the disk’s surface, led to the improvements in density from 1 to 20
megabits per square inch (Mbpsi) between 1976 and 1989. As S-curve theory
would predict, the improvement in recording density obtainable with ferrite/
oxide technology began to level off toward the end of the period, suggesting a
maturing technology. The thin-film head and disk technologies’ effect on the
industry sustained performance improvement at its historical rate. Thin-film
heads were barely established in the early 1990s, when even more advanced
magneto-resistive head technology emerged. The impact of magneto-resistive
technology sustained, or even accelerated, the rate of performance improvement.
Figure 1.4 Impact of New Read-Write Head Technologies in Sustaining the
Trajectory of Improvement in Recording Density
Source: Data are from various issues of Disk/Trend Report.
Figure 1.5 describes a sustaining technological change of a very different
character: an innovation in product architecture, in which the 14-inch
Winchester drive is substituted for removable disk packs, which had been the
dominant design between 1962 and 1978. Just as in the thin-film for ferrite/oxide
substitution, the impact of Winchester technology sustained the historically
established rate of performance improvement. Similar graphs could be
constructed for most other technological innovations in the industry, such as
embedded servo systems, RLL and PRML recording codes, higher RPM motors,
and embedded interfaces. Some of these were straightforward technology
improvements; others were radical departures. But all had a similar impact on
the industry: They helped manufacturers to sustain the rate of historical
performance improvement that their customers had come to expect. 7
In literally every case of sustaining technology change in the disk drive
industry, established firms led in development and commercialization. The
emergence of new disk and head technologies illustrates this.
In the 1970s, some manufacturers sensed that they were reaching the limit on
the number of bits of information they could pack onto oxide disks. In response,
disk drive manufacturers began studying ways of applying super-thin films of
disk drive manufacturers began studying ways of applying super-thin films of
magnetic metal on aluminum to sustain the historical rate of improvements in
recording density. The use of thin-film coatings was then highly developed in
the integrated circuit industry, but its application to magnetic disks still
presented substantial challenges. Experts estimate that the pioneers of thin-film
disk technology—IBM, Control Data, Digital Equipment, Storage Technology,
and Ampex—each took more than eight years and spent more than $50 million
in that effort. Between 1984 and 1986, about two-thirds of the producers active
in 1984 introduced drives with thin-film disks. The overwhelming majority of
these were established industry incumbents. Only a few entrant firms attempted
to use thin-film disks in their initial products, and most of those folded shortly
after entry.
Figure 1.5 Sustaining Impact of the Winchester Architecture on the Recording
Density of 14-inch Disk Drives
Source: Data are from various issues of Disk/Trend Report.
The same pattern was apparent in the emergence of thin-film heads.
Manufacturers of ferrite heads saw as early as 1965 the approaching limit to
improvements in this technology; by 1981 many believed that the limits of
precision would soon be reached. Researchers turned to thin-film technology,
produced by sputtering thin films of metal on the recording head and then using
photolithography to etch much finer electromagnets than could be attained with
ferrite technology. Again, this proved extraordinarily difficult. Burroughs in
1976, IBM in 1979, and other established firms first successfully incorporated
thin-film heads in disk drives. In the period between 1982 and 1986, during
which some sixty firms entered the rigid disk drive industry, only four (all
commercial failures) attempted to do so using thin-film heads in their initial
products as a source of performance advantage. All other entrant firms—even
aggressively performance-oriented firms such as Maxtor and Conner Peripherals
—found it preferable to learn their way using conventional ferrite heads first,
before tackling thin-film technology.
As was the case with thin-film disks, the introduction of thin-film heads
entailed the sort of sustained investment that only established firms could
handle. IBM and its rivals each spent more than $100 million developing thinfilm heads. The pattern was repeated in the next-generation magneto-resistive
head technology: The industry’s largest firms—IBM, Seagate, and Quantum—
led the race.
The established firms were the leading innovators not just in developing
risky, complex, and expensive component technologies such as thin-film heads
and disks, but in literally every other one of the sustaining innovations in the
industry’s history. Even in relatively simple innovations, such as RLL recording
codes (which took the industry from double-to triple-density disks), established
firms were the successful pioneers, and entrant firms were the technology
followers. This was also true for those architectural innovations—for example,
14-inch and 2.5-inch Winchester drives— whose impact was to sustain
established improvement trajectories. Established firms beat out the entrants.
Figure 1.6 summarizes this pattern of technology leadership among
established and entrant firms offering products based on new sustaining
technologies during the years when those technologies were emerging. The
pattern is stunningly consistent. Whether the technology was radical or
incremental, expensive or cheap, software or hardware, component or
architecture, competence-enhancing or competence-destroying, the pattern was
the same. When faced with sustaining technology change that gave existing
customers something more and better in what they wanted, the leading
customers something more and better in what they wanted, the leading
practitioners of the prior technology led the industry in the development and
adoption of the new. Clearly, the leaders in this industry did not fail because they
became passive, arrogant, or risk-averse or because they couldn’t keep up with
the stunning rate of technological change. My technology mudslide hypothesis
wasn’t correct.
Figure 1.6 Leadership of Established Firms in Sustaining Technologies
Source: Data are from various issues of Disk/Trend Report.
FAILURE IN THE FACE OF DISRUPTIVE TECHNOLOGICAL
CHANGES
Most technological change in the disk drive industry has consisted of sustaining
innovations of the sort described above. In contrast, there have been only a few
of the other sort of technological change, called disruptive technologies. These
were the changes that toppled the industry’s leaders.
The most important disruptive technologies were the architectural
innovations that shrunk the size of the drives—from 14-inch diameter disks to
diameters of 8, 5.25, and 3.5-inches and then from 2.5 to 1.8 inches. Table 1.1
illustrates the ways these innovations were disruptive. Based on 1981 data, it
compares the attributes of a typical 5.25-inch drive, a new architecture that had
been in the market for less than a year, with those of a typical 8-inch drive,
which at that time was the standard drive used by minicomputer manufacturers.
Along the dimensions of performance important to established minicomputer
manufacturers—capacity, cost per megabyte, and access time—the 8-inch
product was vastly superior. The 5.25-inch architecture did not address the
perceived needs of minicomputer manufacturers at that time. On the other hand,
the 5.25-inch drive had features that appealed to the desktop personal computer
market segment just emerging in the period between 1980 and 1982. It was small
and lightweight, and, priced at around $2,000, it could be incorporated into
desktop machines economically.
Generally disruptive innovations were technologically straightforward,
consisting of off-the-shelf components put together in a product architecture that
was often simpler than prior approaches. 8 They offered less of what customers
in established markets wanted and so could rarely be initially employed there.
They offered a different package of attributes valued only in emerging markets
remote from, and unimportant to, the mainstream.
The trajectory map in Figure 1.7 shows how this series of simple but
disruptive technologies proved to be the undoing of some very aggressive,
astutely managed disk drive companies. Until the mid-1970s, 14-inch drives
with removable packs of disks accounted for nearly all disk drive sales. The 14inch Winchester architecture then emerged to sustain the trajectory of recording
density improvement. Nearly all of these drives (removable disks and
Winchesters) were sold to mainframe computer manufacturers, and the same
companies that led the market in disk pack drives led the industry’s transition to
companies that led the market in disk pack drives led the industry’s transition to
the Winchester technology.
Table 1.1 A Disruptive Technology Change: The 5.25-inch Winchester Disk
Drive (1981)
Source: Data are from various issues of Disk/Trend Report.
Figure 1.7 Intersecting Trajectories of Capacity Demanded versus Capacity
Supplied in Rigid Disk Drives
Source: Clayton M. Christensen, “The Rigid Disk Drive Industry: A History of
Commercial and Technological Turbulence,” Business History Review 67, no. 4
(Winter 1993): 559. Reprinted by permission.
The trajectory map shows that the hard disk capacity provided in the median
priced, typically configured mainframe computer system in 1974 was about 130
MB per computer. This increased at a 15 percent annual rate over the next
fifteen years—a trajectory representing the disk capacity demanded by the
typical users of new mainframe computers. At the same time, the capacity of the
average 14-inch drive introduced for sale each year increased at a faster, 22
percent rate, reaching beyond the mainframe market to the large scientific and
supercomputer markets. 9
Between 1978 and 1980, several entrant firms—Shugart Associates,
Micropolis, Priam, and Quantum—developed smaller 8-inch drives with 10, 20,
30, and 40 MB capacity. These drives were of no interest to mainframe
computer manufacturers, which at that time were demanding drives with 300 to
400 MB capacity. These 8-inch entrants therefore sold their disruptive drives
into a new application—minicomputers. 10 The customers—Wang, DEC, Data
General, Prime, and Hewlett-Packard—did not manufacture mainframes, and
their customers often used software substantially different from that used in
mainframes. These firms hitherto had been unable to offer disk drives in their
small, desk-side minicomputers because 14-inch models were too big and
expensive. Although initially the cost per megabyte of capacity of 8-inch drives
was higher than that of 14-inch drives, these new customers were willing to pay
a premium for other attributes that were important to them—especially smaller
size. Smallness had little value to mainframe users.
Once the use of 8-inch drives became established in minicomputers, the hard
disk capacity shipped with the median-priced minicomputer grew about 25
percent per year: a trajectory determined by the ways in which minicomputer
owners learned to use their machines. At the same time, however, the 8-inch
drive makers found that, by aggressively adopting sustaining innovations, they
could increase the capacity of their products at a rate of more than 40 percent per
year—nearly double the rate of increase demanded by their original “home”
minicomputer market. In consequence, by the mid-1980s, 8-inch drive makers
were able to provide the capacities required for lower-end mainframe computers.
Unit volumes had grown significantly so that the cost per megabyte of 8-inch
drives had declined below that of 14-inch drives, and other advantages became
apparent: For example, the same percentage mechanical vibration in an 8-inch
drive, as opposed to a 14-inch drive, caused much less variance in the absolute
position of the head over the disk. Within a three-to-four-year period, therefore,
8-inch drives began to invade the market above them, substituting for 14-inch
drives in the lower-end mainframe computer market.
As the 8-inch products penetrated the mainframe market, the established
manufacturers of 14-inch drives began to fail. Two-thirds of them never
introduced an 8-inch model. The one-third that introduced 8-inch models did so
about two years behind the 8-inch entrant manufacturers. Ultimately, every 14inch drive maker was driven from the industry. 11
The 14-inch drive makers were not toppled by the 8-inch entrants because of
technology. The 8-inch products generally incorporated standard off-the-shelf
components, and when those 14-inch drive makers that did introduce 8-inch
models got around to doing so, their products were very performancecompetitive in capacity, areal density, access time, and price per megabyte. The
8-inch models introduced by the established firms in 1981 were nearly identical
in performance to the average of those introduced that year by the entrant firms.
In addition, the rates of improvement in key attributes (measured between 1979
and 1983) were stunningly similar between established and entrant firms. 12
Held Captive by Their Customers
Why were the leading drive makers unable to launch 8-inch drives until it was
too late? Clearly, they were technologically capable of producing these drives.
Their failure resulted from delay in making the strategic commitment to enter the
emerging market in which the 8-inch drives initially could be sold. Interviews
with marketing and engineering executives close to these companies suggest that
the established 14-inch drive manufacturers were held captive by customers.
Mainframe computer manufacturers did not need an 8-inch drive. In fact, they
explicitly did not want it: they wanted drives with increased capacity at a lower
cost per megabyte. The 14-inch drive manufacturers were listening and
responding to their established customers. And their customers—in a way that
was not apparent to either the disk drive manufacturers or their computermaking customers—were pulling them along a trajectory of 22 percent capacity
growth in a 14-inch platform that would ultimately prove fatal.
13
Figure 1.7 maps the disparate trajectories of performance improvement
demanded in the computer product segments that emerged later, compared to the
capacity that changes in component technology and refinements
in system design made available within each successive
architecture. The solid lines emanating from points A, B,
C, D, and E measure the disk drive capacity provided
with the median-priced computer in each category, while
the dotted lines from the same points measure the average
capacity of all disk drives introduced for sale in each
architecture, for each year. These transitions are briefly
described below.
The Advent of the 5.25-inch Drive
In 1980, Seagate Technology introduced 5.25-inch disk drives. Their capacities
of 5 and 10 MB were of no interest to minicomputer manufacturers, who were
demanding drives of 40 and 60 MB from their suppliers. Seagate and other firms
that entered with 5.25-inch drives in the period 1980 to 1983 (for example,
Miniscribe, Computer Memories, and International Memories) had to pioneer
new applications for their products and turned primarily
to desktop personal computer makers. By 1990, the use
of hard drives in desktop computers was an obvious
application for magnetic recording. It was not at all clear
in 1980, however, when the market was just emerging,
that many people could ever afford or use a hard drive on
the desktop. The early 5.25-inch drive makers found this
application (one might even say that they enabled it) by
trial and error, selling drives to whomever would buy
them.
Once the use of hard drives was established in desktop PCs, the disk capacity
shipped with the median-priced machine (that is, the capacity demanded by the
general PC user) increased about 25 percent per year. Again, the technology
improved at nearly twice the rate demanded in the new market: The capacity of
new 5.25-inch drives increased about 50 percent per year between 1980 and
1990. As in the 8-inch for 14-inch substitution, the first firms to produce 5.25inch drives were entrants; on average, established firms lagged behind entrants
by two years. By 1985, only half of the firms producing 8-inch drives had
introduced 5.25-inch models. The other half never did.
Growth in the use of 5.25-inch drives occurred in two waves. The first
followed creation of a new application for rigid disk drives: desktop computing,
in which product attributes such as physical size, relatively unimportant in
established applications, were highly valued. The second wave followed
established applications, were highly valued. The second wave followed
substitution of 5.25-inch disks for larger drives in established minicomputer and
mainframe computer markets, as the rapidly increasing capacity of 5.25-inch
drives intersected the more slowly growing
trajectories of capacity demanded in these markets. Of
the four leading 8-inch drive makers—Shugart
Associates, Micropolis, Priam, and Quantum—only
Micropolis survived to become a significant manufacturer
of 5.25-inch drives, and that was accomplished only with
Herculean managerial effort, as described in chapter 5.
The Pattern Is Repeated: The Emergence of the 3.5-inch Drive
The 3.5-inch drive was first developed in 1984 by Rodime, a Scottish entrant.
Sales of this architecture were not significant, however, until Conner
Peripherals, a spinoff of 5.25-inch drive makers Seagate and Miniscribe, started
shipping product in 1987. Conner had developed a small, lightweight drive
architecture that was much more rugged than its 5.25-inch ancestors. It handled
electronically functions that had previously been managed with mechanical
parts, and it used microcode to replace functions that had previously been
addressed electronically. Nearly all of Conner’s first year revenues of $113
million 14 came from Compaq Computer, which had aided Conner’s start-up
with a $30 million investment. The Conner drives were used primarily in a new
application—portable and laptop machines, in addition to “small footprint”
desktop models—where customers were willing to accept lower capacities and
higher costs per megabyte to get lighter weight, greater ruggedness, and lower
power consumption.
Seagate engineers were not oblivious to the coming of the 3.5-inch
architecture. Indeed, in early 1985, less than one year after Rodime introduced
the first 3.5-inch drive and two years before Conner Peripherals started shipping
its product, Seagate personnel showed working 3.5-inch prototype drives to
customers for evaluation. The initiative for the new drives came from Seagate’s
engineering organization. Opposition to the program came primarily from the
marketing organization and Seagate’s executive team; they argued that the
market wanted higher capacity drives at a lower cost per megabyte and that 3.5inch drives could never be built at a lower cost per megabyte than 5.25-inch
drives.
Seagate’s marketers tested the 3.5-inch prototypes with customers in the
desktop computing market it already served—manufacturers like IBM, and
value-added resellers of full-sized desktop computer systems. Not surprisingly,
they indicated little interest in the smaller drive. They were looking for
capacities of 40 and 60 megabytes for their next-generation machines, while the
3.5-inch architecture could provide only 20 MB—and at higher costs. 15
In response to lukewarm reviews from customers, Seagate’s program
manager lowered his 3.5-inch sales estimates, and the firm’s executives canceled
the program. Their reasoning? The markets for 5.25-inch products were larger,
and the sales generated by spending the engineering effort on new 5.25-inch
products would create greater revenues for the company than would efforts
targeted at new 3.5-inch products.
In retrospect, it appears that Seagate executives read the market—at least
their own market—very accurately. With established applications and product
architectures of their own, such as the IBM XT and AT, these customers saw no
value in the improved ruggedness or the reduced size, weight, and power
consumption of 3.5-inch products.
Seagate finally began shipping 3.5-inch drives in early 1988—the same year
in which the performance trajectory of 3.5-inch drives (shown in Figure 1.7)
intersected the trajectory of capacity demanded in desktop computers. By that
time, the industry had shipped, cumulatively, nearly $750 million in 3.5-inch
products. Interestingly, according to industry observers, as of 1991 almost none
of Seagate’s 3.5-inch products had been sold to manufacturers of
portable/laptop/notebook computers. In other words, Seagate’s primary
customers were still desktop computer manufacturers, and many of its 3.5-inch
drives were shipped with frames for mounting them in computers designed for
5.25-inch drives.
The fear of cannibalizing sales of existing products is often cited as a reason
why established firms delay the introduction of new technologies. As the
Seagate-Conner experience illustrates, however, if new technologies enable new
market applications to emerge, the introduction of new technology may not be
inherently cannibalistic. But when established firms wait until a new technology
has become commercially mature in its new applications and launch their own
version of the technology only in response to an attack on their home markets,
the fear of cannibalization can become a self-fulfilling prophecy.
Although we have been looking at Seagate’s response to the development of
the 3.5-inch drive architecture, its behavior was not atypical; by 1988, only 35
percent of the drive manufacturers that had established themselves making 5.25inch products for the desktop PC market had introduced 3.5-inch drives. Similar
to earlier product architecture transitions, the barrier to development of a
competitive 3.5-inch product does not appear to have been engineering-based.
As in the 14-to 8-inch transition, the new-architecture drives introduced by the
incumbent, established firms during the transitions from 8 to 5.25 inches and
from 5.25 to 3.5 inches were fully performance-competitive with those of entrant
drives. Rather, the 5.25-inch drive manufacturers seem to have been misled by
their customers, notably IBM and its direct competitors and resellers, who
themselves seemed as oblivious as Seagate to the potential benefits and
possibilities of portable computing and the new disk drive architecture that
might facilitate it.
Prairietek, Conner, and the 2.5-inch Drive
In 1989 an industry entrant in Longmont, Colorado, Prairietek, upstaged the
industry by announcing a 2.5-inch drive, capturing nearly all $30 million of this
nascent market. But Conner Peripherals announced its own 2.5-inch product in
early 1990 and by the end of that year had claimed 95 percent of the 2.5-inch
drive market. Prairietek declared bankruptcy in late 1991, by which time each of
the other 3.5-inch drivemakers— Quantum, Seagate, Western Digital, and
Maxtor—had introduced 2.5-inch drives of their own.
What had changed? Had the incumbent leading firms finally learned the
lessons of history? Not really. Although Figure 1.7 shows the 2.5-inch drive had
significantly less capacity than the 3.5-inch drives, the portable computing
markets into which the smaller drives were sold valued other attributes: weight,
ruggedness, low power consumption, small physical size, and so on. Along these
dimensions, the 2.5-inch drive offered improved performance over that of the
3.5-inch product: It was a sustaining technology. In fact, the computer makers
who bought Conner’s 3.5-inch drive—laptop computer manufacturers such as
Toshiba, Zenith, and Sharp—were the leading makers of notebook computers,
and these firms needed the smaller 2.5-inch drive architecture. Hence, Conner
and its competitors in the 3.5-inch market followed their customers seamlessly
across the transition to 2.5-inch drives.
In 1992, however, the 1.8-inch drive emerged, with a distinctly disruptive
character. Although its story will be recounted in detail later, it suffices to state
here that by 1995, it was entrant firms that controlled 98 percent of the $130
million 1.8-inch drive market. Moreover, the largest initial market for 1.8-inch
drives wasn’t in computing at all. It was in portable heart monitoring devices!
Figure 1.8 summarizes this pattern of entrant firms’ leadership in disruptive
technology. It shows, for example, that two years after the 8-inch drive was
introduced, two-thirds of the firms producing it (four of six), were entrants. And,
two years after the first 5.25-inch drive was introduced, 80 percent of the firms
producing these disruptive drives were entrants.
Figure 1.8 Leadership of Entrant Firms in Disruptive Technology
Source: Data are from various issues of Disk/Trend Report.
SUMMARY
There are several patterns in the history of innovation in the disk drive industry.
The first is that the disruptive innovations were technologically straightforward.
They generally packaged known technologies in a unique architecture and
enabled the use of these products in applications where magnetic data storage
and retrieval previously had not been technologically or economically feasible.
The second pattern is that the purpose of advanced technology development
in the industry was always to sustain established trajectories of performance
improvement: to reach the higher-performance, higher-margin domain of the
upper right of the trajectory map. Many of these technologies were radically new
and difficult, but they were not disruptive. The customers of the leading disk
drive suppliers led them toward these achievements. Sustaining technologies, as
a result, did not precipitate failure.
The third pattern shows that, despite the established firms’ technological
prowess in leading sustaining innovations, from the simplest to the most radical,
the firms that led the industry in every instance of developing and adopting
disruptive technologies were entrants to the industry, not its incumbent leaders.
This book began by posing a puzzle: Why was it that firms that could be
esteemed as aggressive, innovative, customer-sensitive organizations could
ignore or attend belatedly to technological innovations with enormous strategic
importance? In the context of the preceding analysis of the disk drive industry,
this question can be sharpened considerably. The established firms were, in fact,
aggressive, innovative, and customer-sensitive in their approaches to sustaining
innovations of every sort. But the problem established firms seem unable to
confront successfully is that of downward vision and mobility, in terms of the
trajectory map. Finding new applications and markets for these new products
seems to be a capability that each of these firms exhibited once, upon entry, and
then apparently lost. It was as if the leading firms were held captive by their
customers, enabling attacking entrant firms to topple the incumbent industry
leaders each time a disruptive technology emerged. 16 Why this happened, and is
still happening, is the subject of the next chapter.
APPENDIX 1.1:
A NOTE ON THE DATA AND METHOD
USED TO GENERATE FIGURE 1.7
The trajectories mapped in Figure 1.7 were calculated as follows. Data on the
capacity provided with computers was obtained from Data Sources, an annual
publication listing the technical specifications of all computer models available
from every computer manufacturer. For instances in which particular models
were available with different features and configurations, the manufacturer
provided Data Sources with a “typical” system configuration with defined
random access memory (RAM) capacity, performance specifications of
peripheral equipment (including disk drives), list prices, and year of
introduction. For instances in which a given computer model was offered for
sale over a sequence of years, the hard disk capacity provided in the typical
configuration typically increased. Data Sources used the categories mainframe,
mini/midrange, desktop personal, portable and laptop, and notebook. As of 1993,
1.8-inch drives were not being used in hand-held computers, so no data on that
potential market existed.
For Figure 1.7, for each year and each class of computers, all models
available for sale were ranked by price and the hard disk capacity provided with
the median-priced model identified. The best-fit lines through the resultant time
series were plotted as the solid lines in Figure 1.7 for expository simplification to
indicate the trend in typical machines. In reality, of course, there is a wide band
around these lines. The frontier of performance—the highest capacity offered
with the most expensive computers—was substantially higher than the typical
values shown.
The dotted lines in Figure 1.7 represent the best-fit line through the
unweighted average capacity of all disk drives introduced for sale in each given
architecture for each year. This data was taken from Disk/Trend Report. Again,
for expository simplification, only this average line is shown. There was a wide
band of capacities introduced for sale in each year, so that the frontier or highest
capacity drive introduced in each year was substantially above the average
shown. Stated in another way, a distinction must be made between the full range
of products available for purchase and those in typical systems. The upper and
lower bands around the median and average figures shown in Figure 1.7 are
generally parallel to the lines shown.
Because higher capacity drives were available in the market than were
offered with the median-priced systems, the solid-line trajectories in Figure 1.7,
as I state in the text, represent the capacities “demanded” in each market. In
other words, the capacity per machine was not constrained by technological
availability. Rather, it represents the selection of hard disk capacity by computer
users, given the prevailing cost.
NOTES
1. A more complete history of the disk drive industry can be found in Clayton
M. Christensen, “The Rigid Disk Drive Industry: A History of Commercial
and Technological Turbulence,” Business History Review (67), Winter, 1993,
531–588. This history focuses only on the manufacturers of rigid disk drives
or hard drives—products on which data are stored on rigid metal platters.
Companies manufacturing floppy disk drives (removable diskettes of flexible
mylar coated with iron oxide on which data are stored) historically were
different firms from those making hard disk drives.
2. Much of the data for this analysis came from Disk/Trend Report, a highly
respected annual market research publication, augmented with more detailed
product-specification sheets obtained from the disk drive manufacturers
themselves. I am grateful to the editors and staff at Disk/Trend, Inc., for their
patient and generous assistance in this project.
3. The concept of trajectories of technological progress was examined by
Giovanni Dosi in “Technological Paradigms and Technological Trajectories,”
Research Policy (11), 1982, 147–162.
4. The ways in which the findings of this study differ from those of some earlier
scholars of technology change while building upon those of others are
discussed in greater detail in chapter 2.
5. The first technology for making heads built an electromagnet by wrapping a
fine thread of copper wire around a core of iron oxide (ferrite); hence the term
ferrite head. Incremental improvements to this approach involved learning to
grind the ferrite to finer and finer dimensions, using better lapping techniques,
and strengthening the ferrite by doping it with barium. Thin-film heads were
made photolithographically, using technology similar to that used in making
integrated circuits on silicon wafers to etch the electromagnet on the surface
of the head. This was difficult because it involved much thicker layers of
material than were common in IC manufacturing. The third technology,
adopted starting in the mid-1990s, was called magneto-resistive heads. These
were also made with thin-film photolithography, but used the principle that
changes in the magnetic flux field on the disk surface changed the electrical
resistivity of the circuitry in the head. By measuring changes in resistivity
rather than changes in the direction of current flow, magneto-resistive heads
were much more sensitive, and hence permitted denser data recording, than
prior technology. In the evolution of disk technology, the earliest disks were
made by coating fine needle-shaped particles of iron oxide—literally rust—
over the surface of a flat, polished aluminum platter. Hence, these disks were
called oxide disks. Incremental improvements to this technology involved
making finer and finer iron oxide particles, and dispersing them more
uniformly, with fewer uncoated voids on the aluminum platter’s surface. This
was supplanted by a sputtering technology, also borrowed from
semiconductor processing, that coated the aluminum platter with a thin film of
metal a few angstroms thick. The thinness of this layer; its continuous, rather
than particulate nature; and the process’s flexibility in depositing magnetic
materials with higher coercivity, enabled denser recording on thin-film disks
than was feasible on oxide disks.
6. Richard J. Foster, Innovation: The Attacker’s Advantage (New York: Summit
Books, 1986).
7. The examples of technology change presented in Figures 1.1 and 1.2
introduce some ambiguity to the unqualified term discontinuity, as used by
Giovanni Dosi (see “Technological Paradigms and Technological
Trajectories,” Research Policy [11] 1982), Michael L. Tushman and Philip
Anderson (see “Technological Discontinuities and Organizational
Environments,” Administrative Science Quarterly [31], 1986), and others. The
innovations in head and disk technology described in Figure 1.4 represent
positive discontinuities in an established technological trajectory, while the
trajectory-disrupting technologies charted in Figure 1.7 represent negative
discontinuities. As will be shown below, established firms seemed quite
capable of leading the industry over positive discontinuities, but generally lost
their industry lead when faced with negative discontinuities.
8. This tendency consistently appears across a range of industries. Richard S.
Rosenbloom and Clayton M. Christensen (in “Technological Discontinuities,
Organizational Capabilities, and Strategic Commitments,” Industrial and
Corporate Change [3], 1994, 655–685) suggest a much broader set of
industries in which leading firms may have been toppled by technologically
straightforward disruptive innovations than is covered in this book.
9. A summary of the data and procedures used to generate Figure 1.7 is included
in Appendix 1.1.
10. The minicomputer market was not new in 1978, but it was a new application
for Winchester-technology disk drives.
11. This statement applies only to independent drive makers competing in the
OEM market. Some of the vertically integrated computer makers, such as
IBM, have survived across these generations with the benefit of a captive
internal market. Even IBM, however, addressed the sequence of different
emerging markets for disk drives by creating autonomous “start-up” disk drive
organizations to address each one. Its San Jose organization focused on highend (primarily mainframe) applications. A separate division in Rochester,
MN, focused on mid-range computers and workstations. IBM created a
different organization in Fujisawa, Japan, to produce drives for the desktop
personal computer market.
12. This result is very different from that observed by Rebecca M. Henderson
(see The Failure of Established Firms in the Face of Technological Change: A
Study of the Semiconductor Photolithographic Alignment Industry,
dissertation, Harvard University, 1988), who found the new-architecture
aligners produced by the established manufacturers to be inferior in
performance to those produced by entrant firms. One possible reason for these
different results is that the successful entrants in the photolithographic aligner
industry studied by Henderson brought to the new product a well-developed
body of technological knowledge and experience developed and refined in
other markets. In the case studied here, none of the entrants brought such
well-developed knowledge with them. Most, in fact, were de novo start-ups
composed of managers and engineers who had defected from established drive
manufacturing firms.
13. This finding is similar to the phenomenon observed by Joseph L. Bower, who
saw that explicit customer demands have tremendous power as a source of
impetus in the resource allocation process: “When the discrepancy (the
problem to be solved by a proposed investment) was defined in terms of cost
and quality, the projects languished. In all four cases, the definition process
moved toward completion when capacity to meet sales was perceived to be
inadequate…. In short, pressure from the market reduces both the probability
and the cost of being wrong.” Although Bower specifically refers to
manufacturing capacity, the same fundamental phenomenon—the power of
the known needs of known customers in marshaling and directing the
investments of a firm—affects response to disruptive technology. See Joseph
L. Bower, Managing the Resource Allocation Process (Homewood, IL:
Richard D. Irwin, 1970) 254.
14. In booking $113 million in revenues, Conner Peripherals set a record for
booking more revenues in its first year of operation than any manufacturing
company in United States history.
15. This finding is consistent with what Robert Burgelman has observed. He
noted that one of the greatest difficulties encountered by corporate
entrepreneurs has been finding the right “beta test sites” where products could
be interactively developed and refined with customers. Generally, a new
venture’s entrée to the customer was provided by the salesperson representing
the firm’s established product lines. This helped the firm develop new
products for established markets but not to identify new applications for new
technology. See Robert A. Burgelman and Leonard Sayles, Inside Corporate
Innovation (New York: The Free Press, 1986) 76–80.
16. I believe this insight—that attacking firms have an advantage in disruptive
innovations but not in sustaining ones—clarifies, but is not in conflict with,
Foster’s assertions about the attacker’s advantage. The historical examples
Foster uses to substantiate his theory generally seem to have been disruptive
innovations. See Richard J. Foster, Innovation: The Attacker’s Advantage
(New York: Summit Books, 1986).
CHAPTER TWO
Value Networks and the Impetus to Innovate
From the earliest studies of the problems of innovation, scholars,
consultants, and managers have tried to explain why leading firms frequently
stumble when confronting technology change. Most explanations either zero in
on managerial, organizational, and cultural responses to technological change or
focus on the ability of established firms to deal with radically new technology;
doing the latter requires a very different set of skills from those that an
established firm historically has developed. Both approaches, useful in
explaining why some companies stumble in the face of technological change, are
summarized below. The primary purpose of this chapter, however, is to propose
a third theory of why good companies can fail, based upon the concept of a value
network. The value network concept seems to have much greater power than the
other two theories in explaining what we observed in the disk drive industry.
ORGANIZATIONAL AND MANAGERIAL EXPLANATIONS OF
FAILURE
One explanation for why good companies fail points to organizational
impediments as the source of the problem. While many analyses of this type stop
with such simple rationales as bureaucracy, complacency, or
“risk-averse” culture, some remarkably insightful studies
exist in this tradition. Henderson and Clark, 1 for
example, conclude that companies’ organizational
structures typically facilitate component-level
innovations, because most product development
organizations consist of subgroups that correspond to a
product’s components. Such systems work very well as
long as the product’s fundamental architecture does not
require change. But, say the authors, when architectural
technology change is required, this type of structure
impedes innovations that require people and groups to
communicate and work together in new ways.
This notion has considerable face validity. In one incident recounted in Tracy
Kidder’s Pulitzer Prize–winning narrative, The Soul of a New Machine, Data
General engineers developing a next-generation minicomputer intended to
leapfrog the product position of Digital Equipment Corporation were allowed by
a friend of one team member into his facility in the middle of the night to
examine Digital’s latest computer, which his company had just bought. When
Tom West, Data General’s project leader and a former long-time Digital
employee, removed the cover of the DEC minicomputer and examined its
structure, he saw “Digital’s organization chart in the design of the product.”
2
Because an organization’s structure and how its groups work together may
have been established to facilitate the design of its dominant product, the
direction of causality may ultimately reverse itself: The organization’s structure
and the way its groups learn to work together can then affect the way it can and
cannot design new products.
CAPABILITIES AND RADICAL TECHNOLOGY AS AN
EXPLANATION
In assessing blame for the failure of good companies, the distinction is
sometimes made between innovations requiring very different technological
capabilities, that is, so-called radical change, and those that build upon wellpracticed technological capabilities, often called incremental innovations.
3
The notion is that the magnitude of the technological
change relative to the companies’ capabilities will
determine which firms triumph after a technology
invades an industry. Scholars who support this view find
that established firms tend to be good at improving what
they have long been good at doing, and that entrant firms
seem better suited for exploiting radically new
technologies, often because they import the technology
into one industry from another, where they had already
developed and practiced it.
Clark, for example, has reasoned that companies build the technological
capabilities in a product such as an automobile hierarchically and experientially.
4
An organization’s historical choices about which
technological problems it would solve and which it would
avoid determine the sorts of skills and knowledge it
accumulates. When optimal resolution of a product or
process performance problem demands a very different
set of knowledge than a firm has accumulated, it may
very well stumble. The research of Tushman, Anderson,
and their associates supports Clark’s hypothesis.
5
They found that firms failed when a technological
change destroyed the value of competencies previously
cultivated and succeeded when new technologies
enhanced them.
The factors identified by these scholars undoubtedly affect the fortunes of
firms confronted with new technologies. Yet the disk drive industry displays a
series of anomalies accounted for by neither set of theories. Industry leaders first
introduced sustaining technologies of every sort, including architectural and
component innovations that rendered prior competencies irrelevant and made
massive investments in skills and assets obsolete. Nevertheless, these same firms
stumbled over technologically straightforward but disruptive changes such as the
8-inch drive.
The history of the disk drive industry, indeed, gives a very different meaning
to what constitutes a radical innovation among leading, established firms. As we
saw, the nature of the technology involved (components versus architecture and
incremental versus radical), the magnitude of the risk, and the time horizon over
which the risks needed to be taken had little relationship to the patterns of
leadership and followership observed. Rather, if their customers needed an
innovation, the leading firms somehow mustered the resources and wherewithal
to develop and adopt it. Conversely, if their customers did not want or need an
innovation, these firms found it impossible to commercialize even
technologically simple innovations.
VALUE NETWORKS AND NEW PERSPECTIVE ON THE
DRIVERS OF FAILURE
What, then, does account for the success and failure of entrant and established
firms? The following discussion synthesizes from the history
of the disk drive industry a new perspective on the
relation between success or
failure and changes in technology and market structure.
The concept of the value network—the context within
which a firm identifies and responds to customers’ needs,
solves problems, procures input, reacts to competitors,
and strives for profit—is central to this synthesis.
6
Within a value network, each firm’s competitive
strategy, and particularly its past choices of markets,
determines its perceptions
of the economic value of a new technology. These
perceptions, in turn, shape the rewards different firms
expect to obtain
through pursuit of sustaining and disruptive innovations.
7
In established firms, expected rewards, in their turn,
drive the allocation of resources toward sustaining
innovations and
away from disruptive ones. This pattern of resource
allocation accounts for established firms’ consistent
leadership in the
former and their dismal performance in the latter.
Value Networks Mirror Product Architecture
Companies are embedded in value networks because their products generally are
embedded, or nested hierarchically, as components within other products and
eventually within end systems of use. 8 Consider a 1980s-vintage management
information system (MIS) for a large organization, as illustrated in Figure 2.1.
The architecture of the MIS ties together various components—a mainframe
computer; peripherals such as line printers and tape and disk drives; software; a
large, air-conditioned room with cables running under a raised floor; and so on.
At the next level, the mainframe computer is itself an architected system,
comprising such components as a central processing unit, multi-chip packages
and circuit boards, RAM circuits, terminals, controllers, and disk drives.
Telescoping down still further, the disk drive is a system whose components
include a motor, actuator, spindle, disks, heads, and controller. In turn, the disk
itself can be analyzed as a system composed of an aluminum platter, magnetic
material, adhesives, abrasives, lubricants, and coatings.
Although the goods and services constituting such a system of use may all be
produced within a single, extensively integrated corporation such as AT&T or
IBM, most are tradable, especially in more mature markets. This means that,
while Figure 2.1 is drawn to describe the nested physical architecture of a
product system, it also implies the existence of a nested network of producers
and markets through which the components at each level are made and sold to
integrators at the next higher level in the system. Firms that design and assemble
disk drives, for example, such as Quantum and Maxtor, procure read-write heads
from firms specializing in the manufacture of those heads, and they buy disks
from other firms and spin motors, actuator motors, and integrated circuitry from
still others. At the next higher level, firms that design and assemble computers
may buy their integrated circuits, terminals, disk drives, IC packaging, and
power supplies from various firms that manufacture those particular products.
This nested commercial system is a value network.
Figure 2.1 A Nested, or Telescoping, System of Product Architectures
Source: Reprinted from Research Policy 24, Clayton M. Christensen and
Richard S. Rosenbloom, “Explaining the Attacker’s Advantage: Technological
Paradigms, Organizational Dynamics, and the Value Network,” 233–257, 1995
with kind permission of Elsevier Science–NL, Sara Burgerhartstraat 25, 1055
KV Amsterdam, The Netherlands.
Figure 2.2 illustrates three value networks for computing applications:
Reading top to bottom they are the value network for a corporate MIS systemof-use, for portable personal computing products, and for computer-automated
design (CAD). Drawn only to convey the concept of how networks are bounded
and may differ from each other, these depictions are not meant to represent
complete structures.
Metrics of Value
The way value is measured differs across networks. 9 In fact, the unique rankordering of the importance of various product performance attributes defines, in
part, the boundaries of a value network. Examples in Figure 2.2, listed to the
right of the center column of component boxes, show how each value network
exhibits a very different rank-ordering of important product attributes, even for
the same product. In the top-most value network, disk drive performance is
measured in terms of capacity, speed, and reliability, whereas in the portable
computing value network, the important performance attributes are ruggedness,
low power consumption, and small size. Consequently, parallel value networks,
each built around a different definition of what makes a product valuable, may
exist within the same broadly defined industry.
Although many components in different systems-of-use may carry the same
labels (for example, each network in Figure 2.2 involves read-write heads, disk
drives, RAM circuits, printers, software, and so on), the nature of components
used may be quite different. Generally, a set of competing firms, each with its
own value chain, 10 is associated with each box in a network diagram, and the
firms supplying the products and services used in each network often differ (as
illustrated in Figure 2.2 by the firms listed to the left of the center column of
component boxes).
As firms gain experience within a given network, they are likely to develop
capabilities, organizational structures, and cultures tailored to their value
network’s distinctive requirements. Manufacturing volumes, the slope of ramps
to volume production, product development cycle times, and organizational
consensus identifying the customer and the customer’s needs may differ
substantially from one value network to the next.
Figure 2.2 Examples of Three Value Networks
Source: Reprinted from Research Policy 24, Clayton M. Christensen and
Richard S. Rosenbloom, “Explaining the Attacker’s Advantage: Technological
Paradigms, Organizational Dynamics, and the Value Network,” 233–257, 1995
with kind permission of Elsevier Science—NL, Sara Burgerhartstraat 25, 1055
KV Amsterdam, The Netherlands.
Given the data on the prices, attributes, and performance characteristics of
thousands of disk drive models sold between 1976 and 1989, we can use a
technique called hedonic regression analysis to identify how markets valued
individual attributes and how those attribute values changed over time.
Essentially, hedonic regression analysis expresses the total price of a product as
the sum of individual so-called shadow prices (some positive, others negative)
that the market places on each of the product’s characteristics. Figure 2.3 shows
some results of this analysis to illustrate how different value networks can place
very different values on a given performance attribute. Customers in the
mainframe computer value network in 1988 were willing on average to pay
$1.65 for an incremental megabyte of capacity; but moving across the
minicomputer, desktop, and portable computing value networks, the shadow
price of an incremental megabyte of capacity declines to $1.50, $1.45, and
$1.17, respectively. Conversely, portable and desktop computing customers were
willing to pay a high price in 1988 for a cubic inch of size reduction, while
customers in the other networks placed no value on that attribute at all. 11
Figure 2.3 Difference in the Valuation of Attributes Across Different Value
Networks
Cost Structures and Value Networks
The definition of a value network goes beyond the attributes of the physical
product. For example, competing within the mainframe computer network
shown in Figure 2.2 entails a particular cost structure. Research, engineering,
and development costs are substantial. Manufacturing overheads are high
relative to direct costs because of low unit volumes and customized product
configurations. Selling directly to end users involves significant sales force
costs, and the field service network to support the complicated machines
represents a substantial ongoing expense. All these costs must be incurred in
order to provide the types of products and services customers in this value
network require. For these reasons, makers of mainframe computers, and makers
of the 14-inch disk drives sold to them, historically needed gross profit margins
of between 50 percent and 60 percent to cover the overhead cost structure
inherent to the value network in which they competed.
Competing in the portable computer value network, however, entails a very
different cost structure. These computer makers incur little expense researching
component technologies, preferring to build their machines with proven
component technologies procured from vendors. Manufacturing involves
assembling millions of standard products in low-labor-cost regions. Most sales
are made through national retail chains or by mail order. As a result, companies
in this value network can be profitable with gross margins of 15 percent to 20
percent. Hence, just as a value network is characterized by a specific rankordering of product attributes valued by customers, it is also characterized by a
specific cost structure required to provide the valued products and services.
Each value network’s unique cost structure is illustrated in Figure 2.4. Gross
margins typically obtained by manufacturers of 14-inch disk drives, about 60
percent, are similar to those required by mainframe computer makers: 56
percent. Likewise, the margins 8-inch drive makers earned were similar to those
earned by minicomputer companies (about 40 percent), and the margins typical
of the desktop value network, 25 percent, also typified both the computer makers
and their disk drive suppliers.
The cost structures characteristic of each value network can have a powerful
effect on the sorts of innovations firms deem profitable. Essentially, innovations
that are valued within a firm’s value network, or in a network where
characteristic gross margins are higher, will be perceived as profitable. Those
technologies whose attributes make them valuable only in networks with lower
gross margins, on the other hand, will not be viewed as profitable, and are
unlikely to attract resources or managerial interest. (We will explore the impact
of each value network’s characteristic cost structures upon the established firms’
mobility and fortunes more fully in chapter 4.)
Figure 2.4 Characteristic Cost Structures of Different Value Networks
Source: Data are from company annual reports and personal interviews with
executives from several representative companies in each network.
In sum, the attractiveness of a technological opportunity and the degree of
difficulty a producer will encounter in exploiting it are determined by, among
other factors, the firm’s position in the relevant value network. As we shall see,
the manifest strength of established firms in sustaining innovation and their
weakness in disruptive innovation—and the opposite manifest strengths and
weaknesses of entrant firms—are consequences not of differences in
technological or organizational capabilities between incumbent and entrant
firms, but of their positions in the industry’s different value networks.
TECHNOLOGY S-CURVES AND VALUE NETWORKS
The technology S-curve forms the centerpiece of thinking about technology
strategy. It suggests that the magnitude of a product’s performance improvement
in a given time period or due to a given amount of engineering effort is likely to
differ as technologies mature. The theory posits that in the early stages of a
technology, the rate of progress in performance will be relatively slow. As the
technology becomes better understood, controlled, and diffused, the rate of
technological improvement will accelerate. 12 But in its mature stages, the
technology will asymptotically approach a natural or physical limit such that
ever greater periods of time or inputs of engineering effort will be required to
achieve improvements. Figure 2.5 illustrates the resulting pattern.
Many scholars have asserted that the essence of strategic technology
management is to identify when the point of inflection on the present
technology’s S-curve has been passed, and to identify and develop whatever
successor technology rising from below will eventually supplant the present
approach. Hence, as depicted by the dotted curve in Figure 2.5, the challenge is
to successfully switch technologies at the point where S-curves of old and new
intersect. The inability to anticipate new technologies threatening from below
and to switch to them in a timely way has often been cited as the cause of failure
of established firms and as the source of advantage for entrant or attacking firms.
13
How do the concepts of S-curves and of value networks relate to each other?
14 The typical framework of intersecting S-curves illustrated in Figure 2.5 is a
conceptualization of sustaining technological changes within a single value
network, where the vertical axis charts a single measure of product performance
(or a rank-ordering of attributes). Note its similarity to Figure 1.4, which
measured the sustaining impact of new recording head technologies on the
recording density of disk drives. Incremental improvements within each
technology drove improvements along each of the individual curves, while
movement to new head technologies involved a more radical leap. Recall that
there was not a single example in the history of technological innovation in the
disk drive industry of an entrant firm leading the industry or securing a viable
market position with a sustaining innovation. In every instance, the firms that
anticipated the eventual flattening of the current technology and that led in
identifying, developing, and implementing the new technology that sustained the
overall pace of progress were the leading practitioners of the prior technology.
These firms often incurred enormous financial risks, committing to new
technologies a decade or more in advance and wiping out substantial bases of
assets and skills. Yet despite these challenges, managers of the industry’s
established firms navigated the dotted line course shown in Figure 2.5 with
remarkable, consistent agility.
Figure 2.5 The Conventional Technology S-Curve
Source: Clayton M. Christensen, “Exploring the Limits of the Technology SCurve. Part I: Component Technologies,” Production and Operations
Management 1, no. 4 (Fall 1992): 340. Reprinted by permission.
A disruptive innovation, however, cannot be plotted in a figure such as 2.5,
because the vertical axis for a disruptive innovation, by definition, must measure
different attributes of performance than those relevant in established value
networks. Because a disruptive technology gets its commercial start in emerging
value networks before invading established networks, an S-curve framework
such as that in Figure 2.6 is needed to describe it. Disruptive technologies
emerge and progress on their own, uniquely defined trajectories, in a home value
network. If and when they progress to the point that they can satisfy the level
and nature of performance demanded in another value network, the disruptive
technology can then invade it, knocking out the established technology and its
established practitioners, with stunning speed.
Figures 2.5 and 2.6 illustrate clearly the innovator’s dilemma that precipitates
the failure of leading firms. In disk drives (and in the other industries covered
later in this book), prescriptions such as increased investments in R&D; longer
investment and planning horizons; technology scanning, forecasting, and
mapping; as well as research consortia and joint ventures are all relevant to the
challenges posed by the sustaining innovations whose ideal pattern is depicted in
Figure 2.5. Indeed, the evidence suggests that many of the best established firms
have applied these remedies and that they can work when managed well in
treating sustaining technologies. But none of these solutions addresses the
situation in Figure 2.6, because it represents a threat of a fundamentally different
nature.
Figure 2.6 Disruptive Technology S-Curve
Source: Clayton M. Christensen, “Exploring the Limits of the Technology SCurve. Part I: Component Technologies,” Production and Operations
Management 1, no. 4 (Fall 1992): 361. Reprinted by permission.
MANAGERIAL DECISION MAKING AND DISRUPTIVE
TECHNOLOGICAL CHANGE
Competition within the value networks in which companies are embedded
defines in many ways how the firms can earn their money. The network defines
the customers’ problems to be addressed by the firm’s products and services and
how much can be paid for solving them. Competition and customer demands in
the value network in many ways shape the firms’ cost structure, the firm size
required to remain competitive, and the necessary rate of growth. Thus,
managerial decisions that make sense for companies outside a value network
may make no sense at all for those within it, and vice versa.
We saw, in chapter 1, a stunningly consistent pattern of successful
implementation of sustaining innovations by established firms and their failure
to deal with disruptive ones. The pattern was consistent because the managerial
decisions that led to those outcomes made sense. Good managers do what makes
sense, and what makes sense is primarily shaped by their value network.
This decision-making pattern, outlined in the six steps below, emerged from
my interviews with more than eighty managers who played key roles in the disk
drive industry’s leading firms, both incumbents and entrants, at times when
disruptive technologies had emerged. In these interviews I tried to reconstruct, as
accurately and from as many points of view as possible, the forces that
influenced these firms’ decision-making processes regarding the development
and commercialization of technologies either relevant or irrelevant to the value
networks in which the firms were at the time embedded. My findings
consistently showed that established firms confronted with disruptive technology
change did not have trouble developing the requisite technology: Prototypes of
the new drives had often been developed before management was asked to make
a decision. Rather, disruptive projects stalled when it came to allocating scarce
resources among competing product and technology development proposals
(allocating resources between the two value networks shown at right and left in
Figure 2.6, for example). Sustaining projects addressing the needs of the firms’
most powerful customers (the new waves of technology within the value
network depicted in Figure 2.5) almost always preempted resources from
disruptive technologies with small markets and poorly defined customer needs.
This characteristic pattern of decisions is summarized in the following pages.
Because the experience was so archetypical, the struggle of Seagate Technology,
the industry’s dominant maker of 5.25-inch drives, to successfully
commercialize the disruptive 3.5-inch drive is recounted in detail to illustrate
each of the steps in the pattern. 15
Step 1: Disruptive Technologies Were First Developed within
Established Firms
Although entrants led in commercializing disruptive technologies, their
development was often the work of engineers at established firms, using
bootlegged resources.
Rarely initiated by senior management, these
architecturally innovative designs almost always
employed off-the-shelf components.
Thus, engineers at Seagate Technology, the leading 5.25inch drive maker, were, in 1985, the second in the
industry to develop working prototypes of 3.5-inch
models. They made some eighty prototype models before
the issue of formal project approval was raised with
senior management. The same thing happened earlier at
Control Data and Memorex, the dominant 14-inch drive
makers, where engineers had designed working 8-inch
drives internally, nearly two years before the product
appeared in the market.
Step 2: Marketing Personnel Then Sought Reactions from Their
Lead Customers
The engineers then showed their prototypes to marketing personnel, asking
whether a market for the smaller, less expensive (and lower performance) drives
existed. The marketing organization, using its habitual procedure for testing the
market appeal of new drives, showed the prototypes to lead customers of the
existing product line, asking them for an evaluation. 16 Thus, Seagate marketers
tested the new 3.5-inch drives with IBM’s PC Division and other makers of XTand AT-class desktop personal computers—even though the drives had
significantly less capacity than the mainstream desktop market demanded.
Not surprisingly, therefore, IBM showed no interest in Seagate’s disruptive
3.5-inch drives. IBM’s engineers and marketers were looking for 40 and 60 MB
drives, and they already had a slot for 5.25-inch drives designed into their
computer; they needed new drives that would take them further along their
established performance trajectory. Finding little customer interest, Seagate’s
marketers drew up pessimistic sales forecasts. In addition, because the products
were simpler, with lower performance, forecast profit margins were lower than
those for higher performance products, and Seagate’s financial analysts,
therefore, joined their marketing colleagues in opposing the disruptive program.
Working from such input, senior managers shelved the 3.5-inch drive—just as it
was becoming firmly established in the laptop market.
This was a complex decision, made in a context of competing proposals to
expend the same resources to develop new products that marketers felt were
critical to remaining competitive with current customers and achieving
aggressive growth and profit targets. “We needed a new model,” recalled a
former Seagate manager, “which could become the next ST412 [a very
successful product generating $300 million sales annually in the desktop market
that was near the end of its life cycle]. Our forecasts for the 3.5-inch drive were
under $50 million because the laptop market was just emerging, and the 3.5-inch
product just didn’t fit the bill.”
Seagate managers made an explicit decision not to pursue the disruptive
technology. In other cases, managers did approve resources for pursuing a
disruptive product—but, in the day-to-day decisions about how time and money
would actually be allocated, engineers and marketers, acting in the best interests
of the company, consciously and unconsciously starved the disruptive project of
of the company, consciously and unconsciously starved the disruptive project of
resources necessary for a timely launch.
When engineers at Control Data, the leading 14-inch drive maker, were
officially chartered to develop CDC’s initial 8-inch drives, its customers were
looking for an average of 300 MB per computer, whereas CDC’s earliest 8-inch
drives offered less than 60 MB. The 8-inch project was given low priority, and
engineers assigned to its development kept getting pulled off to work on
problems with 14-inch drives being designed for more important customers.
Similar problems plagued the belated launches of Quantum’s and Micropolis’s
5.25-inch products.
Step 3: Established Firms Step Up the Pace of Sustaining
Technological Development
In response to the needs of current customers, the marketing managers threw
impetus behind alternative sustaining projects, such as incorporating
better heads or developing new recording codes. These
gave customers what they wanted and could be targeted
at large markets to generate the necessary sales and
profits for maintaining growth. Although often involving
greater development expense, such sustaining
investments appeared far less risky than investments in
the disruptive technology: The customers existed, and
their needs were known.
Seagate’s decision to shelve the 3.5-inch drive in 1985 to 1986, for example,
seems starkly rational. Its view downmarket (in terms of the disk drive trajectory
map) was toward a small total market forecast for 1987 for 3.5-inch drives.
Gross margins in that market were uncertain, but manufacturing executives
predicted that costs per megabyte for 3.5-inch drives would be much higher than
for 5.25-inch drives. Seagate’s view upmarket was quite different. Volumes in
5.25-inch drives with capacities of 60 to 100 MB were forecast to be $500
million by 1987. Companies serving the 60 to 100 MB market were earning
gross margins of between 35 and 40 percent, whereas Seagate’s margins in its
high-volume 20 MB drives were between 25 and 30 percent. It simply did not
make sense for Seagate to put its resources behind the 3.5-inch drive when
competing proposals to move upmarket by developing its ST251 line of drives
were also being actively evaluated.
After Seagate executives shelved the 3.5-inch project, the firm began
introducing new 5.25-inch models at a dramatically accelerated rate. In 1985,
1986, and 1987, the numbers of new models annually introduced as a percentage
of the total number of its models on the market in the prior year were 57, 78, and
115 percent, respectively. And during the same period, Seagate incorporated
115 percent, respectively. And during the same period, Seagate incorporated
complex and sophisticated new component technologies such as thin-film disks,
voice-coil actuators,
17
RLL codes, and embedded SCSI interfaces. Clearly,
the motivation in doing this was to win the competitive
wars against other established firms, which were making
similar improvements, rather than to prepare for an attack
by entrants from below.
18
Step 4: New Companies Were Formed, and Markets for the
Disruptive Technologies Were Found by Trial and Error
New companies, usually including frustrated engineers from established firms,
were formed to exploit the disruptive product architecture. The founders of the
leading 3.5-inch drive maker, Conner Peripherals, were disaffected employees
from Seagate and Miniscribe, the two largest 5.25-inch manufacturers. The
founders of 8-inch drive maker Micropolis came
from Pertec, a 14-inch drive manufacturer, and the
founders of Shugart and Quantum defected from
Memorex.
19
The start-ups, however, were as unsuccessful as their former employers in
attracting established computer makers to the disruptive architecture.
Consequently, they had to find new customers. The applications that emerged in
this very uncertain, probing process were the minicomputer, the desktop
personal computer, and the laptop computer. In retrospect, these were obvious
markets for hard drives, but at the time, their ultimate size and significance were
highly uncertain. Micropolis was founded before the emergence of the desk-side
minicomputer and word processor markets in which its products came to be
used. Seagate began when personal computers were simple toys for hobbyists,
two years before IBM introduced its PC. And Conner Peripherals got its start
before Compaq knew the potential size of the portable computer market. The
founders of these firms sold their products without a clear marketing strategy—
essentially selling to whoever would buy. Out of what was largely a trial-anderror approach to the market, the ultimately dominant applications for their
products emerged.
Step 5: The Entrants Moved Upmarket
Once the start-ups had discovered an operating base in new markets, they
realized that, by adopting sustaining improvements in new component
technologies,
20
they could increase the capacity of their drives at a
faster rate than their new market required. They blazed
trajectories of 50 percent annual improvement, fixing
their sights on the large, established computer markets
immediately above them on the performance scale.
The established firms’ views downmarket and the entrant firms’ views
upmarket were asymmetrical. In contrast to the unattractive margins and market
size that established firms saw when eyeing the new, emerging markets for
simpler drives, the entrants saw the potential volumes and margins in the
upscale, high-performance markets above them as highly attractive. Customers
in these established markets eventually embraced the new architectures they had
rejected earlier, because once their needs for capacity and speed were met, the
new drives’ smaller size and architectural simplicity made them cheaper, faster,
and more reliable than the older architectures. Thus, Seagate, which started in
the desktop personal computer market, subsequently invaded and came to
dominate the minicomputer, engineering workstation, and mainframe computer
markets for disk drives. Seagate, in turn, was driven from the desktop personal
computer market for disk drives by Conner and Quantum, the pioneering
manufacturers of 3.5-inch drives.
Step 6: Established Firms Belatedly Jumped on the Bandwagon to
Defend Their Customer Base
When the smaller models began to invade established market segments, the drive
makers that had initially controlled those markets took their prototypes off the
shelf (where they had been put in Step 3) and introduced them in order to defend
their customer base in their own market. By this time, of course, the new
architecture had shed its disruptive character and become fully performancecompetitive with the larger drives in the established markets. Although some
established manufacturers were able to defend their market positions through
belated introduction of the new architecture, many found that the entrant firms
had developed insurmountable advantages in manufacturing cost and design
experience, and they eventually withdrew from the market. The firms attacking
from value networks below brought with them cost structures set to achieve
profitability at lower gross margins. The attackers therefore were able to price
their products profitably, while the defending, established firms experienced a
severe price war.
For established manufacturers that did succeed in introducing the new
architectures, survival was the only reward. None ever won a significant share of
the new market; the new drives simply cannibalized sales of older products to
existing customers. Thus, as of 1991, almost none of Seagate’s 3.5-inch drives
had been sold to portable/laptop manufacturers: Its 3.5-inch customers still were
desktop computer manufacturers, and many of its 3.5-inch drives continued to be
shipped with frames permitting them to be mounted in XT-and AT-class
computers designed to accommodate 5.25-inch drives.
Control Data, the 14-inch leader, never captured even a 1 percent share of the
minicomputer market. It introduced its 8-inch drives nearly three years after the
pioneering start-ups did, and nearly all of its drives were sold to its existing
mainframe customers. Miniscribe, Quantum, and Micropolis all had the same
cannibalistic experience when they belatedly introduced disruptive technology
drives. They failed to capture a significant share of the new market, and at best
succeeded in defending a portion of their prior business.
The popular slogan “stay close to your customers” appears not always to be
robust advice. 21 One instead might expect customers to lead their suppliers
toward sustaining innovations and to provide no leadership—or even to
explicitly mislead—in instances of disruptive technology change. 22
FLASH MEMORY AND THE VALUE NETWORK
The predictive power of the value network framework is currently being tested
with the emergence of flash memory: a solid-state semiconductor memory
technology that stores data on silicon memory chips. Flash differs from
conventional dynamic random access memory (DRAM) technology in that the
chip retains the data even when the power is off. Flash memory is a disruptive
technology. Flash chips consume less than 5 percent of the power that a disk
drive of equivalent capacity would consume, and because they have no moving
parts, they are far more rugged than disk memory. Flash chips have
disadvantages, of course. Depending on the amount of memory, the cost per
megabyte of flash can be between five and fifty times greater than disk memory.
And flash chips are not as robust for writing: They can only be overwritten a few
hundred thousand times before wearing out, rather than a few million times for
disk drives.
The initial applications for flash memory were in value networks quite distant
from computing; they were in devices such as cellular phones, heart monitoring
devices, modems, and industrial robots in which individually packaged flash
chips were embedded. Disk drives were too big, too fragile, and used too much
power to be used in these markets. By 1994, these applications for individually
packaged flash chips—“socket flash” in industry parlance—accounted for $1.3
billion in industry revenues, having grown from nothing in 1987.
In the early 1990s, the flash makers produced a new product format, called a
flash card: credit card–sized devices on which multiple flash chips, linked and
governed by controller circuitry, were mounted. The chips on flash cards were
controlled by the same control circuitry, SCSI (Small Computer Standard
Interface, an acronym first used by Apple), as was used in disk drives, meaning
that in concept, a flash card could be used like a disk drive for mass storage. The
flash card market grew from $45 million in 1993 to $80 million in 1994, and
forecasters were eyeing a $230 million flash card market by 1996.
Will flash cards invade the disk drive makers’ core markets and supplant
magnetic memory? If they do, what will happen to the disk drive makers? Will
they stay atop their markets, catching this new technological wave? Or will they
be driven out?
The Capabilities Viewpoint
Clark’s concept of technological hierarchies (see note 4) focuses on the skills
and technological understanding that a company accumulates as the result of the
product and process technology problems it has addressed in the past. In
evaluating the threat to the disk drive makers of flash memory, someone using
Clark’s framework, or the related findings of Tushman and Anderson (see note
5), would focus on the extent to which disk drive makers have historically
developed expertise in integrated circuit design and in the design and control of
devices composed of multiple integrated circuits. These frameworks would lead
us to expect that drive makers will stumble badly in their attempts to develop
flash products if they have limited expertise in these domains and will succeed if
their experience and expertise are deep.
On its surface, flash memory involves radically different electronics
technology than the core competence of disk drive makers (magnetics and
mechanics). But such firms as Quantum, Seagate, and Western Digital have
developed deep expertise in custom integrated circuit design through embedding
increasingly intelligent control circuitry and cache memory in their drives.
Consistent with the practice in much of the ASIC (application-specific integrated
circuit) industry, their controller chips are fabricated by independent, third-party
fabricators that own excess clean room semiconductor processing capacity.
Each of today’s leading disk drive manufacturers got its start by designing
drives, procuring components from independent suppliers, assembling them
either in its own factories or by contract, and then selling them. The flash card
business is very similar. Flash card makers design the card and procure the
component flash chips; they design and have fabricated an interface circuit, such
as SCSI, to govern the drive’s interaction with the computing device; they
assemble them either in-house or by contract; and they then market them.
In other words, flash memory actually builds upon important competencies
that many drive makers have developed. The capabilities viewpoint, therefore,
would lead us to expect that disk drive makers may not stumble badly in
bringing flash storage technology to the market. More specifically, the viewpoint
predicts that those firms with the deepest experience in IC design—Quantum,
Seagate, and Western Digital—will bring flash products to market quite readily.
Others, which historically outsourced much of their electronic circuit design,
may face more of a struggle.
This has, indeed, been the case to date. Seagate entered the flash market in
This has, indeed, been the case to date. Seagate entered the flash market in
1993 via its purchase of a 25 percent equity stake in Sundisk Corporation.
Seagate and SunDisk together designed the chips and cards; the chips were
fabricated by Matsushita, and the cards were assembled by a Korean
manufacturer, Anam. Seagate itself marketed the cards. Quantum entered with a
different partner, Silicon Storage Technology, which designed the chips that
were then fabricated and assembled by contract.
The Organizational Structure Framework
Flash technology is what Henderson and Clark would call radical technology. Its
product architecture and fundamental technological concept are novel compared
to disk drives. The organizational structure viewpoint would predict that, unless
they created organizationally independent groups to design flash products,
established firms would stumble badly. Seagate and Quantum did, indeed, rely
on independent groups and did develop competitive products.
The Technology S-Curve Framework
The technology S-curve is often used to predict whether an emerging technology
is likely to supplant an established one. The operative trigger is the slope of the
curve of the established technology. If the curve has passed its point of
inflection, so that its second derivative is negative (the technology is improving
at a decreasing rate), then a new technology may emerge to supplant the
established one. Figure 2.7 shows that the S-curve for magnetic disk recording
still has not hit its point of inflection: Not only is the areal density improving, as
of 1995, it was improving at an increasing rate.
The S-curve framework would lead us to predict, therefore, that whether or
not established disk drive companies possess the capability to design flash cards,
flash memory will not pose a threat to them until the magnetic memory S-curve
has passed its point of inflection and the rate of improvement in density begins
to decline.
Insights from the Value Network Framework
The value network framework asserts that none of the foregoing frameworks is a
sufficient predictor of success. Specifically, even where established firms did not
possess the requisite technological skills to develop a new technology, they
would marshal the resources to develop or acquire them if their customers
demanded it. Furthermore, the value network suggests that technology S-curves
are useful predictors only with sustaining technologies. Disruptive technologies
generally improve at a parallel pace with established ones—their trajectories do
not intersect. The S-curve framework, therefore, asks the wrong question when it
is used to assess disruptive technology. What matters instead is whether the
disruptive technology is improving from below along a trajectory that will
ultimately intersect with what the market needs.
Figure 2.7 Improvements in Areal Density of New Disk Drives (Densities in
Millions of Bits per Square Inch)
Source: Data are from various issues of Disk/Trend Report.
The value network framework would assert that even though firms such as
Seagate and Quantum are able technologically to develop competitive flash
memory products, whether they invest the resources and managerial energy to
build strong market positions in the technology will depend on whether flash
memory can be initially valued and deployed within the value networks in which
the firms make their money.
As of 1996, flash memory can only be used in value networks different from
those of the typical disk drive maker. This is illustrated in Figure 2.8, which
plots the average megabytes of capacity of flash cards introduced each year
between 1992 and 1995, compared with the capacities of 2.5-and 1.8-inch drives
and with the capacity demanded in the notebook computer market. Even though
they are rugged and consume little power, flash cards simply don’t yet pack the
capacity to become the main mass storage devices in notebook computers. And
the price of the flash capacity required to meet what the low end of the portable
computing market demands (about 350 MB in 1995) is too high: The cost of that
much flash capacity would be fifty times higher than comparable disk storage. 23
Figure 2.8 Comparison of Disk Drive Memory Capacity to Flash Card
Source: Data are from various issues of Disk/Trend Report.
The low power consumption and ruggedness of flash certainly have no value
and command no price premium on the desktop. There is, in other words, no
way to use flash today in the markets where firms such as Quantum and Seagate
make their money.
Hence, because flash cards are being used in markets completely different
from those Quantum and Seagate typically engage—palmtop computers,
electronic clipboards, cash registers, electronic cameras, and so on—the value
network framework would predict that firms similar to Quantum and Seagate are
not likely to build market-leading positions in flash memory. This is not because
the technology is too difficult or their organizational structures impede effective
development, but because their resources will become absorbed in fighting for
and defending larger chunks of business in the mainstream disk drive value
networks in which they currently make their money.
Indeed, the marketing director for a leading flash card producer observed,
“We’re finding that as hard disk drive manufacturers move up to the gigabyte
range, they are unable to be cost competitive at the lower capacities. As a result,
disk drive makers are pulling out of markets in the 10 to 40 megabyte range and
creating a vacuum into which flash can move.” 24
The drive makers’ efforts to build flash card businesses have in fact
floundered. By 1995, neither Quantum nor Seagate had built market shares of
even 1 percent of the flash card market. Both companies subsequently concluded
that the opportunity in flash cards was not yet substantial enough, and withdrew
their products from the market the same year. Seagate retained its minority stake
in SunDisk (renamed SanDisk), however, a strategy which, as we shall see, is an
effective way to address disruptive technology.
IMPLICATIONS OF THE VALUE NETWORK FRAMEWORK
FOR INNOVATION
Value networks strongly define and delimit what companies within them can and
cannot do. This chapter closes with five propositions about the nature of
technological change and the problems successful incumbent firms encounter,
which the value network perspective highlights.
1. The context, or value network, in which a firm competes has a profound
influence on its ability to marshal and focus the necessary resources and
capabilities to overcome the technological and organizational hurdles that
impede innovation. The boundaries of a value network are determined by a
unique definition of product performance—a rank-ordering of the importance of
various performance attributes differing markedly from that employed in other
systems-of-use in a broadly defined industry. Value networks are also defined by
particular cost structures inherent in addressing customers’ needs within the
network.
2. A key determinant of the probability of an innovative effort’s commercial
success is the degree to which it addresses the well-understood needs of known
actors within the value network. Incumbent firms are likely to lead their
industries in innovations of all sorts—architecture and components—that
address needs within their value network, regardless of intrinsic technological
character or difficulty. These are straightforward innovations; their value and
application are clear. Conversely, incumbent firms are likely to lag in the
development of technologies—even those in which the technology involved is
intrinsically simple—that only address customers’ needs in emerging value
networks. Disruptive innovations are complex because their value and
application are uncertain, according to the criteria used by incumbent firms.
3. Established firms’ decisions to ignore technologies that do not address
their customers’ needs become fatal when two distinct trajectories interact. The
first defines the performance demanded over time within a given value network,
and the second traces the performance that technologists are able to provide
within a given technological paradigm. The trajectory of performance
improvement that technology is able to provide may have a distinctly different
slope from the trajectory of performance improvement demanded in the systemof-use by downstream customers within any given value network. When the
slopes of these two trajectories are similar, we expect the technology to remain
relatively contained within its initial value network. But when the slopes differ,
new technologies that are initially performance-competitive only within
emerging or commercially remote value networks may migrate into other
networks, providing a vehicle for innovators in new networks to attack
established ones. When such an attack occurs, it is because technological
progress has diminished the relevance of differences in the rank-ordering of
performance attributes across different value networks. For example, the disk
drive attributes of size and weight were far more important in the desktop
computing value network than they were in the mainframe and minicomputer
value networks. When technological progress in 5.25-inch drives enabled
manufacturers to satisfy the attribute prioritization in the mainframe and
minicomputer networks, which prized total capacity and high speed, as well as
that in the desktop network, the boundaries between the value networks ceased
to be barriers to entry for 5.25-inch drive makers.
4. Entrant firms have an attacker’s advantage over established firms in those
innovations—generally new product architectures involving little new
technology per se—that disrupt or redefine the level, rate, and direction of
progress in an established technological trajectory. This is so because such
technologies generate no value within the established network. The only way
established firms can lead in commercializing such technologies is to enter the
value network in which they create value. As Richard Tedlow noted in his
history of retailing in America (in which supermarkets and discount retailing
play the role of disruptive technologies), “the most formidable barrier the
established firms faced is that they did not want to do this.” 25
5. In these instances, although this “attacker’s advantage” is associated with
a disruptive technology change, the essence of the attacker’s advantage is in the
ease with which entrants, relative to incumbents, can identify and make strategic
commitments to attack and develop emerging market applications, or value
networks. At its core, therefore, the issue may be the relative flexibility of
successful established firms versus entrant firms to change strategies and cost
structures, not technologies.
These propositions provide new dimensions for analyzing technological
innovation. In addition to the required capabilities inherent in new technologies
and in the innovating organization, firms faced with disruptive technologies
must examine the implications of innovation for their relevant value networks.
The key considerations are whether the performance attributes implicit in the
innovation will be valued within the networks already served by the innovator;
innovation will be valued within the networks already served by the innovator;
whether other networks must be addressed or new ones created in order to
realize value for the innovation; and whether market and technological
trajectories may eventually intersect, carrying technologies that do not address
customers’ needs today to squarely address their needs in the future.
These considerations apply not simply to firms grappling with the most
modern technologies, such as the fast-paced, complex advanced electronic,
mechanical, and magnetics technologies covered in this chapter. Chapter 3
examines them in the context of a very different industry: earthmoving
equipment.
NOTES
1. See Rebecca M. Henderson and Kim B. Clark, “Architectural Innovation: The
Reconfiguration of Existing Systems and the Failure of Established Firms”
Administrative Science Quarterly (35), 1990, 9–30.
2. Tracy Kidder, The Soul of a New Machine (New York: Avon Books, Inc.,
1981).
3. A few scholars have sought to measure the proportion of technological
progress attributable to radical versus incremental advances. In an empirical
study of a series of novel processes in petroleum refining, for example, John
Enos found that half the economic benefits of new technology came from
process improvements introduced after a new technology was commercially
established. See J. L. Enos, “Invention and Innovation in the Petroleum
Refining Industry,” in The Rate and Direction of Inventive Activity: Economic
and Social Factors, National Bureau of Economic Research Report
(Princeton, NJ: Princeton University Press, 1962), 299–321. My study of the
disk drive industry has shown the same result. Half the advance in areal
density (megabits per square inch of disk surface) can be attributed to new
component technologies and half to incremental improvements in existing
components and refinements in system design. See Clayton M. Christensen,
“Exploring the Limits of the Technology S-Curve,” Production and
Operations Management (1), 1992, 334–366.
4. See Kim B. Clark, “The Interaction of Design Hierarchies and Market
Concepts in Technological Evolution,” Research Policy (14), 1985, 235–251.
Clark suggests, for example, that the early selections by automotive engineers
of gasoline over steam or electrically powered engines defined the technical
agenda for subsequent generations of engineers, who consequently did not
pursue refinements in electric or steam propulsion. Clark has thus shown that
the design skills and technological knowledge resident in companies today
result from the cumulative choices engineers have made of what to tackle
versus what to leave alone. Clark posits that technological improvements
requiring that companies build upon or extend an existing cumulative body of
knowledge favor an industry’s established firms. Conversely, when changes
require a completely different body of knowledge, established firms will be at
a disadvantage compared to firms that had already accumulated a different
hierarchically structured body of knowledge, most likely in another industry.
5. See, for example, Michael L. Tushman and Philip Anderson, “Technological
Discontinuities and Organizational Environments,” Administrative Science
Quarterly (31), 1986, 439–465; and Philip Anderson and Michael Tushman,
“Technological Discontinuities and Dominant Designs,” Administrative
Science Quarterly (35), 1990, 604–633.
6. The concept of value network builds on Giovanni Dosi’s concept of
technological paradigms. See Giovanni Dosi, “Technological Paradigms and
Technological Trajectories, Research Policy (11), 1982, 147–162. Dosi
characterizes a technological paradigm as a “pattern of solution of selected
technological problems, based on selected principles derived from natural
sciences and on selected material technologies” (152). New paradigms
represent discontinuities in trajectories of progress as defined within earlier
paradigms. They tend to redefine the very meaning of progress, and point
technologists toward new classes of problems as the targets of ensuing normal
technology development. The question examined by Dosi—how new
technologies are selected and retained—is closely related to the question of
why firms succeed or fail as beneficiaries of such changes.
7. Value network, as presented here, draws heavily on ideas I developed jointly
with Professor Richard S. Rosenbloom and which are summarized in two
journal articles: Clayton M. Christensen and Richard S. Rosenbloom,
“Explaining the Attacker’s Advantage: The Technological Paradigms,
Organizational Dynamics, and the Value Network,” Research Policy (24),
1995, 233–257; and Richard S. Rosenbloom and Clayton M. Christensen,
“Technological Discontinuities, Organizational Capabilities, and Strategic
Commitments,” Industrial and Corporate Change (3), 1994, 655–685. I am
heavily indebted to Professor Rosenbloom for his contributions to the
development of these perspectives.
8. See D. L. Marples, “The Decisions of Engineering Design,” IEEE
Transactions on Engineering Management EM8, 1961, 55–71; and C.
Alexander, Notes on the Synthesis of Form (Cambridge, MA: Harvard
University Press, 1964).
9. On this point, too, correspondence between the concept of the value network
and Dosi’s concept of technological paradigms is strong. (See note 6.) The
scope and boundaries of a value network are defined by the dominant
technological paradigm and the corresponding technological trajectory
employed at the higher levels of the network. As Dosi suggests, value can be
defined as a function of the dominant technological paradigm in the ultimate
system of use in the value network.
10. Michael Porter, Competitive Advantage (New York: The Free Press, 1985).
11. A more complete report of this analysis can be found in chapter 7 of Clayton
M. Christensen, The Innovator’s Challenge: Understanding the Influence of
Market Environment on Processes of Technology Development in the Rigid
Disk Drive Industry, thesis, Harvard University Graduate School of Business
Administration, 1992.
12. D. Sahal, Patterns of Technological Innovation (London: Addison Wesley,
1981).
13. The most widely read proponent of this view is Richard Foster; see, for
example, his Innovation: The Attacker’s Advantage (New York: Summit
Books, 1986).
14. The insights summarized here are articulated more completely in C. M.
Christensen, “Exploring the Limits of the Technology S-Curve,” Production
and Operations Management (1), 1992, 334–366.
15. A fuller account of similar decisions made in other firms can be found in
Clayton M. Christensen, The Innovator’s Challenge: Understanding the
Influence of Market Environment on Processes of Technology Development in
the Rigid Disk Drive Industry, thesis, Harvard University Graduate School of
Business Administration, 1992.
16. This procedure is consistent with Robert Burgelman’s observation that one of
the greatest difficulties encountered by corporate entrepreneurs is in finding
the right “beta test sites,” where products can be interactively developed and
refined with customers. Generally, the entrée to the customer was provided by
the salesperson who sold the firm’s established product lines. This helped the
firm develop new products for established markets, but not identify new
applications for its new technology. See Robert Burgelman and Leonard
Sayles, Inside Corporate Innovation (New York: The Free Press, 1986) 76–
80. Professor Rebecca Henderson pointed out to me that this tendency always
to take new technologies to mainstream customers reflects a rather narrow
marketing competence—that although many scholars tend to frame the issue
as one of technological competence, such inability to find new markets for
new technologies may be a firm’s most serious handicap in innovation.
17. Voice coil motors were more expensive than the stepper motors that Seagate
had previously used. While not new to the market, they were new to Seagate.
18. This is consistent with the findings reported by Arnold Cooper and Dan
Schendel in “Strategic Responses to Technological Threats,” Business
Horizons (19), February, 1976, 61–69.
19. Ultimately, nearly all North American disk drive manufacturers can trace
their founders’ genealogy to IBM’s San Jose division, which developed and
manufactured its magnetic recording products. See Clayton M. Christensen,
“The Rigid Disk Drive Industry: A History of Commercial and Technological
Turbulence,” Business History Review (67), Winter, 1993, 531–588.
20. In general, these component technologies were developed within the largest
of the established firms that dominated the established markets above these
entrants. This is because new components generally (but not always) have a
sustaining impact on technology trajectories. These high-end, established
firms typically were engaged in the hottest pursuit of sustaining innovations.
21. The research of Eric von Hippel, frequently cited as evidence of the value of
listening to customers, indicates that customers originate a large majority of
new product ideas (see Eric von Hippel, The Sources of Innovation [New
York: Oxford University Press, 1988]). One fruitful avenue for future research
would be to revisit von Hippel’s data in light of the framework presented here.
The value network framework would predict that the innovations toward
which the customers in von Hippel’s study led their suppliers would have
been sustaining innovations. We would expect disruptive innovations to have
come from other sources.
22. Henderson saw similar potential danger for being misled by customers in her
study of photolithographic aligner equipment manufacturers. See Rebecca M.
Henderson, “Keeping Too Close to Your Customers,” Massachusetts Institute
of Technology Sloan School of Management working paper, 1993.
23. Many industry observers have noted that there seems to be a floor on the cost
of making a disk drive, somewhere around $120 per device, below which even
the best manufacturers cannot plunge. This is the basic cost of designing,
producing, and assembling the requisite components. Drive makers keep
reducing costs per megabyte by continuously increasing the number of
megabytes available in that basic $120 box. The effect of this floor on the
competition between disk drives and flash cards may be profound. It means
that in low-capacity applications, as the price of flash memory falls, flash will
become cost-competitive with disk memory. The frontier above which
magnetic disk drives have lower costs per megabyte than flash will keep
moving upmarket, in a manner perfectly analogous to the upmarket movement
of larger disk drive architectures. Experts predicted, in fact, that by 1997, a 40
MB flash card would be priced comparably to a 40 MB disk drive.
24. Lewis H. Young, “Samsung Banks on Tiny Flash Cell,” Electronic Business
Buyer (21), July, 1995, 28.
25. Richard Tedlow, New and Improved: A History of Mass Marketing in
America (Boston: Harvard Business School Press, 1994).
CHAPTER THREE
Disruptive Technological Change in the
Mechanical Excavator Industry
Excavators and their steam shovel predecessors are huge pieces of capital
equipment sold to excavation contractors. While few observers consider this a
fast-moving, technologically dynamic industry, it has points in common with the
disk drive industry: Over its history, leading firms have successfully adopted a
series of sustaining innovations, both incremental and radical, in components
and architecture, but almost the entire population of mechanical shovel
manufacturers was wiped out by a disruptive technology—hydraulics—that the
leaders’ customers and their economic structure had caused them initially to
ignore. Although in disk drives such invasions of established markets occurred
within a few years of the initial emergence of each disruptive technology, the
triumph of hydraulic excavators took twenty years. Yet the disruptive invasion
proved just as decisive and difficult to counter in excavators as those in the disk
drive industry.
1
LEADERSHIP IN SUSTAINING TECHNOLOGICAL CHANGE
From William Smith Otis’ invention of the steam shovel in 1837 through the
early 1920s, mechanical earthmoving equipment was steam-powered. A central
boiler sent steam through pipes to small steam engines at each point where
power was required in the machine. Through a system of pulleys, drums, and
cables, these engines manipulated frontward-scooping buckets, as illustrated in
Figure 3.1. Originally, steam shovels were mounted on rails and used to
excavate earth in railway and canal construction. American excavator
manufacturers were tightly clustered in northern Ohio and near Milwaukee.
In the early 1920s, when there were more than thirty-two steam shovel
manufacturers based in the United States, the industry faced a major
technological upheaval, as gasoline-powered engines were substituted for steam
power. 2 This transition to gasoline power falls into the category that Henderson
and Clark label radical technological transition. The fundamental technological
concept in a key component (the engine) changed from steam to internal
combustion, and the basic architecture of the product changed. Where steam
shovels used steam pressure to power a set of steam engines to extend and retract
the cables that actuated their buckets, gasoline shovels used a single engine and a
very different system of gearing, clutches, drums, and brakes to wind and
unwind the cable. Despite the radical nature of the technological change,
however, gasoline technology had a sustaining impact on the mechanical
excavator industry. Gasoline engines were powerful enough to enable
contractors to move earth faster, more reliably, and at lower cost than any but the
very largest steam shovels.
Figure 3.1 Cable-Actuated Mechanical Shovel Manufactured by Osgood
General
Source: Osgood General photo in Herbert L. Nichols, Jr., Moving the Earth: The
Workbook of Excavation (Greenwich, CT: North Castle, 1955).
The leading innovators in gasoline engine technology were the industry’s
dominant firms, such as Bucyrus, Thew, and Marion. Twenty-three of the
twenty-five largest makers of steam shovels successfully negotiated the
transition to gasoline power. 3 As Figure 3.2 shows, there were a few entrant
firms among the gasoline technology leaders in the 1920s, but the established
firms dominated this transition.
Beginning in about 1928, the established manufacturers of gasoline-powered
shovels initiated the next major, but less radical, sustaining technological
transition—to shovels powered by diesel engines and electric motors. A further
transition, made after World War II, introduced the arched boom design, which
allowed longer reach, bigger buckets, and better down-reaching flexibility. The
established firms continued to embrace and succeed with each of these
innovations.
Figure 3.2 Manufacturers of Gasoline-Powered Cable Shovels, 1920–1934
Source: Data are from the Historical Construction Equipment Association and
from The Thomas Register, various years.
Excavation contractors themselves actually pioneered a number of other
important sustaining innovations, first modifying their own equipment in the
field to make it perform better and then manufacturing excavators incorporating
those features to sell to the broader market. 4
THE IMPACT OF DISRUPTIVE HYDRAULICS TECHNOLOGY
The next major technological change precipitated widespread failure in the
industry. Beginning shortly after World War II and continuing through the late
1960s, while the dominant source of power remained the diesel engine, a new
mechanism emerged for extending and lifting the bucket: hydraulically actuated
systems replaced the cable-actuated systems. Only four of the thirty or so
established manufacturers of cable-actuated equipment in business in the 1950s
(Insley, Koehring, Little Giant, and Link Belt) had successfully transformed
themselves into sustainable hydraulic excavator manufacturers by the 1970s. A
few others survived by withdrawing into making such equipment as huge, cableactuated draglines for strip mining and dredging.
5
Most of the others failed. The firms that overran the
excavation equipment industry at this point were all
entrants into the hydraulics generation: J. I. Case, John
Deere, Drott, Ford, J. C. Bamford, Poclain, International
Harvester, Caterpillar, O & K, Demag, Leibherr,
Komatsu, and Hitachi.
6
Why did this happen?
Performance Demanded in the Mechanical Excavator Market
Excavators are one of many types of earthmoving equipment. Some equipment,
such as bulldozers, loaders, graders, and scrapers, essentially push, smooth, and
lift earth. Excavators
7
have been used to dig holes and trenches, primarily in
three markets: first and largest, the general excavation
market, composed of contractors who dig holes for
basements or civil engineering projects such as canal
construction; second, sewer and piping contractors, who
generally dig long trenches; and third, open pit or strip
mining. In each of these markets, contractors have tended
to measure the functionality of mechanical excavators by
their reach or extension distance and by the cubic yards
of earth lifted in a single scoop.
8
In 1945, sewer and piping contractors used machines whose bucket capacity
averaged about 1 cubic yard (best for digging relatively narrow trenches), while
the average general excavation contractor used excavators that hefted 212 cubic
yards per scoop and mining contractors used shovels holding about 5 cubic
yards. The average bucket capacity used in each of these markets increased at
about 4 percent per year, a rate of increase constrained by other factors in the
broader system-of-use. The logistical problems of transporting large machines
into and out of typical construction sites, for example, helped limit the rate of
increase demanded by contractors.
The Emergence and Trajectory of Improvement of Hydraulic
Excavation
The first hydraulic excavator was developed by a British company, J. C.
Bamford, in 1947. Similar products then emerged simultaneously in several
American companies in the late 1940s, among them, the Henry Company, of
Topeka, Kansas, and Sherman Products, Inc., of Royal Oak, Michigan. The
approach was labeled “Hydraulically Operated Power Take-Off,” yielding an
acronym that became the name of the third entrant to hydraulic excavating in the
late 1940s, HOPTO. 9
Their machines were called backhoes because they were mounted on the
back of industrial or farm tractors. Backhoes excavated by extending the shovel
out, pushing it down into the earth, 10 curling or articulating the shovel under the
slice of earth, and lifting it up out of the hole. Limited by the power and strength
of available hydraulic pumps’ seals, the capacity of these early machines was a
mere ¼ cubic yard, as graphed in Figure 3.3. Their reach was also limited to
about six feet. Whereas the best cable excavators could rotate a full 360 degrees
on their track base, the most flexible backhoes could rotate only 180 degrees.
Because their capacity was so small and their reach so short, hydraulic
excavators were of no use to mining, general excavation, or sewer contractors,
who were demanding machines with buckets that held 1 to 4 cubic yards. As a
result, the entrant firms had to develop a new application for their products.
They began to sell their excavators as attachments for the back of small
industrial and farm tractors made by Ford, J. I. Case, John Deere, International
Harvester, and Massey Ferguson. Small residential contractors purchased these
units to dig narrow ditches from water and sewer lines in the street to the
foundations of houses under construction. These very small jobs had never
warranted the expense or time required to bring in a big, imprecise, cableactuated, track-driven shovel, so the trenches had always been dug by hand.
Hydraulic backhoes attached to highly mobile tractors could do these jobs in less
than an hour per house, and they became extremely popular with contractors
building large tract subdivisions during the housing booms that followed World
War II and the Korean War. These early backhoes were sold through tractor and
implement dealerships accustomed to dealing with small customers.
Figure 3.3 Disruptive Impact of Hydraulics Technology in the Mechanical
Excavator Market
Source: Data are from the Historical Construction Equipment Association.
The early users of hydraulic excavators were, in a word, very different from
the mainstream customers of the cable shovel manufacturers—in size, in needs,
and in the distribution channels through which they bought. They constituted a
new value network for mechanical excavation. Interestingly, just as the
performance of smaller-architecture disk drives was measured in different
metrics than the performance of large drives (weight, ruggedness, and power
consumption versus capacity and speed), the performance of the first backhoes
was measured differently from the performance of cable-actuated equipment.
The metrics featured most prominently in early product literature of hydraulic
backhoes were shovel width (contractors wanted to dig narrow, shallow
trenches) and the speed and maneuverability of the tractor. Figure 3.4, excerpted
from an early product brochure from Sherman Products for its “Bobcat”
hydraulic backhoe, illustrates this. Sherman called its Bobcat a “digger,” showed
it operating in tight quarters, and claimed it could travel over sod with minimum
damage. The Bobcat was mounted on a Ford tractor. (Ford subsequently
acquired the Sherman Bobcat line.) The featured attributes, of course, were
simply irrelevant to contractors whose bread was buttered by big earthmoving
projects. These differences in the rank-ordering of performance attributes
defined the boundaries of the industry’s value networks.
Figure 3.4 Hydraulic Backhoe Manufactured by Sherman Products
Source: Brochure from Sherman Products, Inc., Royal Oak, Michigan, early
1950s.
The solid line in Figure 3.3 charts the rate of improvement in bucket size that
hydraulics engineers were able to provide in the new excavator architecture. The
maximum available bucket size had reached 38 cubic yard by 1955, 12 cubic yard
by 1960, and 2 cubic yards by 1965. By 1974, the largest hydraulic excavators
had the muscle to lift 10 cubic yards. This trajectory of improvement, which was
far more rapid than the rate of improvement demanded in any of the excavator
markets, carried this disruptive hydraulics technology upward from its original
market through the large, mainstream excavation markets. The use of hydraulic
excavators in general contracting markets was given a boost in 1954 when
another entrant firm in Germany, Demag, introduced a track-mounted model that
could rotate on its base a full 360 degrees.
THE RESPONSE TO HYDRAULICS BY THE ESTABLISHED
EXCAVATOR MANUFACTURERS
Just as Seagate Technology was one of the first firms to develop prototype 3.5inch drives, Bucyrus Erie, the leading cable shovel maker, was keenly aware of
the emergence of hydraulic excavating technology. By 1950 (about two years
after the first backhoe appeared) Bucyrus purchased a fledgling hydraulic
backhoe company, the Milwaukee Hydraulics Corporation. Bucyrus faced
precisely the same problem in marketing its hydraulic backhoe as Seagate had
faced with its 3.5-inch drives: Its most powerful mainstream customers had no
use for it.
Bucyrus Erie’s response was a new product, introduced in 1951, called the
“Hydrohoe.” Instead of using three hydraulic cylinders, it used only two, one to
curl the shovel into the earth and one to “crowd” or draw the shovel toward the
cab; it used a cable mechanism to lift the shovel. The Hydrohoe was thus a
hybrid of the two technologies, reminiscent of the early transoceanic steamships
outfitted with sails. 11 There is no evidence, however, that the Hydrohoe’s hybrid
design resulted from Bucyrus engineers’ being “stuck” in some sort of cablebased engineering paradigm. Rather, the cable lift mechanism was the only
viable way at that time, based on the state of hydraulics technology, to give the
Hydrohoe the bucket capacity and reach that Bucyrus marketers thought they
needed to appeal to their existing customers’ needs.
Figure 3.5 presents an excerpt from an early Hydrohoe product brochure.
Note the differences from Sherman’s marketing approach: Bucyrus labeled the
Hydrohoe a “dragshovel,” showed it in an open field, and claimed it could “get a
heaping load on every pass”—all intended to appeal to general excavation
contractors. Rather than commercialize the disruptive technology in the value
network in which the current attributes of hydraulics were prized, Bucyrus tried
to adapt the technology to fit its own value network. Despite this attempt, the
Hydrohoe was still too limited in capacity and reach and did not sell well to
Bucyrus’ customers. Bucyrus kept its Hydrohoe on the market for over a decade,
attempting periodically to upgrade its performance to make it acceptable to its
customers, but the machine was never commercially successful. Ultimately, the
company returned to the cable shovels that its customers needed.
Figure 3.5 Hydrohoe Manufactured by Bucyrus Erie
Source: Brochure from Bucyrus Erie Company, South Milwaukee, Wisconsin,
1951.
Bucyrus Erie was the only maker of cable-actuated shovels known to have
launched a hydraulic excavator between 1948 and 1961: All of the other
manufacturers continued serving their established customers, well and
prosperously. 12 In fact, the largest makers of cable-actuated excavators, Bucyrus
Erie and Northwest Engineering, logged record profits until 1966—the point at
which the disruptive hydraulics technology had squarely intersected with
customers’ needs in the sewer and piping segment. This is typical of industries
facing a disruptive technology: The leading firms in the established technology
remain financially strong until the disruptive technology is, in fact, in the midst
of their mainstream market.
Between 1947 and 1965, twenty-three companies entered the mechanical
excavation market with hydraulic products. Figure 3.6, which measures the total
excavation market with hydraulic products. Figure 3.6, which measures the total
number of active entrants and established firms offering hydraulic excavators
(net of the companies that had exited), shows how completely the entrants
dominated the hydraulic excavator market.
In the 1960s, some of the strongest cable shovel makers introduced shovels
with hydraulics. Almost all of these models were hybrids, however, like Bucyrus
Erie’s Hydrohoe, generally employing a hydraulic cylinder to articulate or curl
the bucket and using cables to extend the bucket out and to lift the boom. When
used in this way in the 1960s, hydraulics had a sustaining impact on the
established manufacturers’ products, improving their performance in the
mainstream value networks. Some of the methods that engineers found to use
hydraulics on the cable excavators were truly ingenious. All of this innovative
energy, however, was targeted at existing customers.
The strategies employed by the excavator manufacturers during this period
highlight an important choice that confronts companies encountering disruptive
technological change. In general, the successful entrants accepted the
capabilities of hydraulics technology in the 1940s and 1950s as a given and
cultivated new market applications in which the technology, as it existed, could
create value. And as a general rule, the established firms saw the situation the
other way around: They took the market’s needs as the given. They consequently
sought to adapt or improve the technology in ways that would allow them to
market the new technology to their existing customers as a sustaining
improvement. The established firms steadfastly focused their innovative
investments on their customers. Subsequent chapters will show that this strategic
choice is present in most instances of disruptive innovation. Consistently,
established firms attempt to push the technology into their established markets,
while the successful entrants find a new market that values the technology.
Figure 3.6 Manufacturers of Hydraulic Excavators, 1948–1965
Source: Data are from the Historical Construction Equipment Association.
Hydraulics technology ultimately did progress to the point where it could
address the needs of mainstream excavation contractors. That progress was
achieved, however, by the entrant companies, who had first found a market for
the initial capabilities of the technology, accumulated design and manufacturing
experience in that market, and then used that commercial platform to attack the
value networks above them. The established firms lost this contest. Only four
cable excavator companies—Insley, Koehring, Little Giant, and Link Belt—
remained as viable suppliers to excavation contractors by successfully but
belatedly introducing lines of hydraulic excavators to defend their markets. 13
Aside from these, however, the other leading manufacturers of big cable
machines in the mainstream excavation markets never introduced a
commercially successful hydraulic excavator. Although some had employed
hydraulics to a modest degree as a bucket-curling mechanism, they lacked the
design expertise and volume-based manufacturing cost position to compete as
hydraulics invaded the mainstream. By the early 1970s, all of these firms had
been driven from the sewer, piping, and general excavation markets by the
entrants, most of which had refined their technological capabilities initially in
the small-contractor market. 14
This contrast in strategies for profiting from change characterizes the
approaches employed by entrant and established firms in many of the other
industries affected by disruptive technologies—particularly disk drives, steel,
computers, and electric cars.
THE CHOICE BETWEEN CABLE AND HYDRAULICS
In the trajectory map of Figure 3.3, when hydraulics technology became capable
of addressing the bucket-size needs of sewer and piping contractors (and a
similar trajectory could be sketched for arm-reach), the competitive dynamics in
the industry changed, and the mainstream excavation contractors changed the
criteria by which they purchased their equipment. Even today, the cable-actuated
architecture can attain much longer reach and greater lift than can hydraulic
excavators: They have roughly parallel technology trajectories. But once both
cable-and hydraulics-actuated systems could satisfy mainstream market
requirements, excavation contractors could no longer base their choice of
equipment on which had longer reach and greater bucket capacity. Both were
good enough, and the fact that cable was better ceased to have competitive
relevance.
Contractors found, however, that hydraulic machines were much less prone
to breakdowns than cable-actuated excavators. In particular, those who had
experienced the life-threatening snap of a cable while hefting a heavy bucket
embraced reliable hydraulics quickly, as soon as it was capable of doing the job.
Once both technologies were good enough in the basic capabilities demanded,
therefore, the basis of product choice in the market shifted to reliability. Sewer
and piping contractors began
adopting hydraulic equipment rapidly beginning in the
early 1960s, and general excavation contractors followed
later in the decade.
CONSEQUENCES AND IMPLICATIONS OF THE HYDRAULICS
ERUPTION
What went wrong within the companies that made cable-actuated excavators?
Clearly, with the benefit of hindsight, they should have invested in hydraulics
machines and embedded that piece of their organizations charged with making
hydraulic products in the value network that needed them. But the dilemma in
managing the disruptive technology in the heat of the battle is that nothing went
wrong inside these companies. Hydraulics was a technology that their customers
didn’t need—indeed, couldn’t use. Each cable shovel manufacturer was one of at
least twenty manufacturers doing everything they could to steal each other’s
customers: If they took their eyes off their customers’ next-generation needs,
existing business would have been put at risk.
Moreover, developing bigger, better, and faster cable
excavators to steal share from existing competitors
constituted a much more obvious opportunity for
profitable growth than did a venture into hydraulic
backhoes, given how small the backhoe market was when
it appeared in the 1950s. So, as we have seen before,
these companies did not fail because the technology
wasn’t available. They did not fail because they lacked
information about hydraulics or how to use it; indeed, the
best of them used it as soon as it could help their
customers. They did not fail because management was
sleepy or arrogant. They failed because hydraulics didn’t
make sense—until it was too late.
The patterns of success and failure we see among firms faced with sustaining
and disruptive technology change are a natural or systematic result of good
managerial decisions. That is, in fact, why disruptive technologies confront
innovators with such a dilemma. Working harder, being smarter, investing more
aggressively, and listening more astutely to customers are all solutions to the
problems posed by new sustaining technologies. But these paradigms of sound
management are useless—even counterproductive, in many instances—when
dealing with disruptive technology.
NOTES
1. A summary of how this same mechanism might have affected a broader range
of industries can be found in Richard S. Rosenbloom and Clayton M.
Christensen, “Technological Discontinuities, Organizational Capabilities, and
Strategic Commitments,” Industrial and Corporate Change (3), 1994, 655–
686.
2. This information and the data used to calculate the graphs in this section were
provided by Dimitrie Toth, Jr., and Keith Haddock, both National Directors of
the Historical Construction Equipment Association. The association has a
wealth of information about the earthmoving equipment industry in its
archives, and Toth and Haddock were most gracious in sharing their
knowledge and information with me. I am also indebted to them for their
helpful comments on an earlier draft of this chapter. Other useful sources of
information are Peter Grimshaw, Excavators (Poole, England: Blandford
Press, 1985); The Olyslager Organisation, Inc., Earthmoving Vehicles
(London: Frederick Warne & Co., Ltd., 1972); Harold F. Williamson and
Kenneth H. Myers, Designed for Digging: The First 75 Years of Bucyrus Erie
Company (Evanston, IL: Northwestern University Press, 1955); and J. L.
Allhands, Tools of the Earthmover (Huntsville, TX: Sam Houston College
Press, 1951).
3. Interestingly, the high success rate was only amongst the industry’s twentyfive largest firms. Only one of the seven smallest steam shovel manufacturers
survived this sustaining technology change to internal gasoline combustion.
Almost no information is available about these companies other than what is
provided by their product brochures. I suspect, however, that the fact that the
large and mid-sized firms cruised through this transition while the small ones
were killed indicates that resources played a part in the story, a conclusion that
complements the theoretical perspectives summarized in chapter 2 above.
Some sustaining technologies clearly are so expensive to develop and
implement or so dependent on proprietary or scarce expertise that some
companies simply cannot successfully manage the transition. I am indebted to
Professor Richard Rosenbloom for sharing his perspective on this issue.
4. An example of this is the development of the first dragline, by Page, a
Chicago area contractor. Page dug Chicago’s system of canals, and invented
the dragline in 1903 to do that job more effectively. Page draglines were later
used extensively in digging the Panama Canal, alongside steam shovels made
by Bucyrus Erie and Marion. This finding that customers were significant
sources of sustaining innovations is consistent with Professor Eric von
Hippel’s findings; see The Sources of Innovation (New York: Oxford
University Press, 1988).
5. The companies that survived the invasion of hydraulics in this way found safe
haven in a particular high-end market. Bucyrus Erie and Marion, for example,
became the dominant makers of the huge stripping shovels used in strip
mines. Marion’s model 6360 stripping shovel was the largest frontwardscooping shovel ever built, able to heft 180 cubic yards in its bucket. (An
advertisement showing Paul Bunyan standing aside the 6360 is one of the
most stunning pieces of advertising art I have seen.) Harnischfeger is the
world’s largest maker of electric mining shovels, while Unit found a niche
making the huge pedestal cranes used on offshore oil rigs. For a time,
Northwest survived by making draglines for dredging ocean shipping lanes. P
& H and Lorain made huge cranes and draglines (all cable-actuated).
6. As the hydraulic excavator has matured, these companies have met with
varying degrees of subsequent success. In 1996, the world’s highest-volume
excavator companies, Demag and O & K, were based in Germany.
7. Technically, excavators that scoop their buckets forward are power shovels.
This was the dominant design from 1837 through the early 1900s, and
persisted as a major market segment through much of this century. Excavators
that pull earth backward toward the cab are backhoes. As the hydraulic
excavator became the dominant design during the 1970s, both types came to
be called excavators. Until hydraulic actuation required the booms to be
permanently attached to the unit, contractors could attach different booms or
arms to their basic power units so that the same unit could work as a shovel,
backhoe, or crane. Similarly, different buckets, sometimes called dippers,
could be attached to move different types of material.
8. The true measure of performance in excavation was the number of cubic yards
of earth that could be moved per minute. This measure was so dependent upon
operator skill and upon the type of earth being dug, however, that contractors
adopted bucket size as the more robust, verifiable metric.
9. These British and American pioneers were followed by several European
manufacturers, each of which was also an entrant to the excavator industry,
including France’s Poclain and Italy’s Bruneri Brothers.
10. The ability to push the shovel into the earth was a major advantage to the
hydraulics approach. The cable-actuated excavators that pulled earth toward
the operator all had to rely on gravity to drive the teeth of the heavy shovel
into the earth.
11. Makers of early hybrid ocean transports, which were steam-powered but still
outfitted with sails, used the same rationale for their design as did the Bucyrus
Erie engineers: Steam power still was not reliable enough for the transoceanic
market, so steam power plants had to be backed up by conventional
technology. The advent of steam-powered ships and their substitution for
wind-powered ships in the transoceanic business is itself a classic study of
disruptive technology. When Robert Fulton sailed the first steamship up the
Hudson River in 1819, it underperformed transoceanic sailing ships on nearly
every dimension of performance: It cost more per mile to operate; it was
slower; and it was prone to frequent breakdowns. Hence, it could not be used
in the transoceanic value network and could only be applied in a different
value network, inland waterways, in which product performance was
measured very differently. In rivers and lakes, the ability to move against the
wind or in the absence of a wind was the attribute most highly valued by ship
captains, and along that dimension, steam outperformed sail. Some scholars
(see, for example, Richard Foster, in Innovation: The Attacker’s Advantage
[New York: Summit Books, 1986]) have marveled at how myopic were the
makers of sailing ships, who stayed with their aging technology until the bitter
end, in the early 1900s, completely ignoring steam power. Indeed, not a single
maker of sailing ships survived the industry’s transition to steam power. The
value network framework offers a perspective on this problem that these
scholars seem to have ignored, however. It was not a problem of knowing
about steam power or of having access to technology. The problem was that
the customers of the sailing ship manufacturers, who were transoceanic
shippers, could not use steam-powered ships until the turn of the century. To
cultivate a position in steamship building, the makers of sailing ships would
have had to engineer a major strategic reorientation into the inland waterway
market, because that was the only value network where steam-powered
vessels were valued throughout most of the 1800s. Hence, it was these firms’
reluctance or inability to change strategy, rather than their inability to change
technology, that lay at the root of their failure in the face of steam-powered
vessels.
12. An exception to this is an unusual product introduced by Koehring in 1957:
the Skooper combined cables and hydraulics to dig earth away from a facing
wall; it did not dig down into the earth.
13. Bucyrus Erie does not fit easily into either of these groups. It introduced a
large hydraulic excavator in the 1950s, but subsequently withdrew it from the
market. In the late 1960s, it acquired the “Dynahoe” line of hydraulic loaderbackhoes from Hy-Dynamic Corporation and sold them as utility machines to
its general excavation customers, but, again, dropped this product line as well.
14. Caterpillar was a very late (but successful) entrant into the hydraulic
excavation equipment industry, introducing its first model in 1972. Excavators
were an extension of its line of dozers, scrapers, and graders. Caterpillar never
participated in the excavation machine market when cable actuation was the
dominant design.
CHAPTER FOUR
What Goes Up, Can’t Go Down
It is clear from the histories of the disk drive and excavator industries that
the boundaries of value networks do not completely imprison the companies
within them: There is considerable upward mobility into other networks. It is in
restraining downward mobility into the markets enabled by disruptive
technologies that the value networks exercise such unusual power. In this
chapter we will explore these questions: Why could leading companies migrate
so readily toward high-end markets, and why does moving downmarket appear
to have been so difficult? Rational managers, as we shall see, can rarely build a
cogent case for entering small, poorly defined low-end markets that offer only
lower profitability. In fact, the prospects for growth and improved profitability in
upmarket value networks often appear to be so much more attractive than the
prospect of staying within the current value network, that it is not unusual to see
well-managed companies leaving (or becoming uncompetitive with) their
original customers as they search for customers at higher price points. In good
companies, resources and energy coalesce most readily behind proposals to
attack upmarket into higher-performance products that can earn higher margins.
Indeed, the prospects for improving financial performance by moving toward
upmarket value networks are so strong that one senses a huge
magnet in the northeast corner of the disk drive and
excavator trajectory maps. This chapter examines the
power of this “northeastern pull” by looking at evidence
from the history of the disk drive industry. It then
generalizes this framework by exploring the same
phenomenon in the battle between minimill and
integrated steel makers.
THE GREAT NORTHEAST MIGRATION IN DISK DRIVES
Figure 4.1 plots in more detail the upmarket movement of Seagate Technology,
whose strategy was typical of most disk drive manufacturers. Recall that Seagate
had spawned, and then grew to dominate, the value network for desktop
computing. Its product position relative to capacity demanded in its market is
mapped by vertical lines which span from the lowest-to the highest-capacity
drives in its product line, in each of the years shown. The black rectangle on the
line measuring each year’s capacity span shows the median capacity of the
drives Seagate introduced in each of those years.
Figure 4.1 Upmarket Migration of Seagate Products
Source: Data are from various issues of Disk/Trend Report.
Between 1983 and 1985, the center of gravity of Seagate’s product line was
positioned squarely on the average capacity demanded in the desktop segment. It
was between 1987 and 1989 that the disruptive 3.5-inch form invaded the
desktop market from below. Seagate responded to that attack, not by fighting the
disruptive technology head-on, but by retreating upmarket. It continued to offer
models in the capacity ranges the desktop PC market demanded, but by 1993 the
focus of its energy had clearly shifted to the market for mid-range computers,
such as file servers and engineering workstations.
Indeed, disruptive technologies have such a devastating impact because the
firms that first commercialized each generation of disruptive disk drives chose
not to remain contained within their initial value network. Rather, they reached
as far upmarket as they could in each new product generation, until their drives
packed the capacity to appeal to the value networks above them. It is this upward
mobility that makes disruptive technologies so dangerous to established firms—
and so attractive to entrants.
VALUE NETWORKS AND CHARACTERISTIC COST
STRUCTURES
What lies behind this asymmetric mobility? As we have already seen, it is driven
by resource allocation processes that direct resources toward new product
proposals that promise higher margins and larger markets. These are almost
always better in the northeast portions of trajectory maps (such as Figures 1.7
and 3.3) than in the southeast. The disk drive manufacturers migrated to the
northeast corner of the product-market map because the resource allocation
processes they employed took them there.
As we saw in chapter 2, a characteristic of each value network is a particular
cost structure that firms within it must create if they are to provide the products
and services in the priority their customers demand. Thus, as the disk drive
makers became large and successful within their “home” value network, they
developed a very specific economic character: tuning their levels of effort and
expenses in research, development, sales, marketing, and administration to the
needs of their customers and the challenges of their competitors. Gross margins
tended to evolve in each value network to levels that enabled the better disk
drive makers to make money, given these costs of doing business.
In turn, this gave these companies a very specific model for improving
profitability. Generally, they found it difficult to improve profitability by
hacking out cost while steadfastly standing in their mainstream market: The
research, development, marketing, and administrative costs they were incurring
were all critical to remaining competitive in their mainstream business. Moving
upmarket toward higher-performance products that promised higher gross
margins was usually a more straightforward path to profit improvement. Moving
downmarket was anathema to that objective.
The obviousness of the path toward profit improvement is shown in Figure
4.2. The three bars on the left depict the size of the desktop, minicomputer, and
mainframe computer value networks in 1981 and are labeled with the
characteristic margins enjoyed by disk drive makers in each of those networks.
Gross margins are clearly higher in higher-end markets, compensating
manufacturers for the higher levels of overhead characteristic of those
businesses.
The differences in the size of these markets and the characteristic cost
structures across these value networks created serious asymmetries in the combat
structures across these value networks created serious asymmetries in the combat
among these firms. Firms making 8-inch drives for the minicomputer market, for
example, had cost structures requiring gross margins of 40 percent. Aggressively
moving downmarket would have pitted them against foes who had honed their
cost structures to make money at 25 percent gross margins. On the other hand,
moving upmarket enabled them to take a relatively lower-cost structure into a
market that was accustomed to giving its suppliers 60 percent gross margins.
Which direction made sense? A similar asymmetry faced the makers of 5.25inch drives in 1986, as they decided whether to spend their resources building a
position in the emerging market for 3.5-inch drives in portable computers or to
move up toward the minicomputer and mainframe companies.
Committing development resources to launch higher-performance products
that could garner higher gross margins generally both offered greater returns and
caused less pain. As their managers were making repeated decisions about which
new product development proposals they should fund and which they should
shelve, proposals to develop higher-performance products targeted at the larger,
higher-margin markets immediately above them always got the resources. In
other words, sensible resource allocation processes were at the root of
companies’ upward mobility and downmarket immobility across the boundaries
of the value networks in the disk drive industry.
The hedonic regression analysis summarized in chapter 2 showed that higherend markets consistently paid significantly higher prices for incremental
megabytes of capacity. Why would anyone opt to sell a megabyte for less when
it could be sold for more? The disk drive companies’ migration to the northeast
was, as such, highly rational.
Figure 4.2 Views Upmarket and Downmarket for Established Disk Drive
Source: Data are from various issues of Disk/Trend Report, corporate annual
reports, and data provided in personal interviews.
Note: Percentages above each bar indicate typical gross margins in each value
network.
Other scholars have found evidence in other industries that as companies
leave their disruptive roots in search of greater profitability in the market tiers
above them, they gradually come to acquire the cost structures required to
compete in those upper market tiers. 1 This exacerbates their problem of
downward immobility.
RESOURCE ALLOCATION AND UPWARD MIGRATION
Further insight into this asymmetric mobility across value networks comes from
comparing two different descriptive models of how resources are allocated. The
first model describes resource allocation as a rational, top-down decision-making
process in which senior managers weigh alternative proposals for investment in
innovation and put money into those projects that they find to be consistent with
firm strategy and to offer the highest return on investment. Proposals that don’t
clear these hurdles are killed.
The second model of resource allocation, first articulated by Joseph Bower, 2
characterizes resource allocation decisions much differently. Bower notes that
most proposals to innovate are generated from deep within the organization not
from the top. As these ideas bubble up from the bottom, the organization’s
middle managers play a critical but invisible role in screening these projects.
These managers can’t package and throw their weight behind every idea that
passes by; they need to decide which are the best, which are most likely to
succeed, and which are most likely to be approved, given the corporate financial,
competitive, and strategic climate.
In most organizations, managers’ careers receive a big boost when they play
a key sponsorship role in very successful projects—and their careers can be
permanently derailed if they have the bad judgment or misfortune to back
projects that fail. Middle managers aren’t penalized for all failures, of course.
Projects that fail because the technologists couldn’t deliver, for example, often
are not (necessarily) regarded as failures at all, because a lot is learned from the
effort and because technology development is generally regarded as an
unpredictable, probabilistic endeavor. But projects that fail because the market
wasn’t there have far more serious implications for managers’ careers. These
tend to be much more expensive and public failures. They generally occur after
the company has made full investments in product design, manufacturing,
engineering, marketing, and distribution. Hence, middle managers—acting in
both their own and the company’s interest—tend to back those projects for
which market demand seems most assured. They then work to package the
proposals for their chosen projects in ways geared to win senior management
approval. As such, while senior managers may think they’re making the resource
allocation decisions, many of the really critical resource allocation decisions
have actually been made long before senior management gets involved: Middle
managers have made their decisions about which projects they’ll back and carry
to senior management—and which they will allow to languish.
Consider the implications of this for a successful firm’s downward and
upward mobility from its initial value network in this hypothetical example. In
the same week, two respected employees, one from marketing, the other from
engineering, run two very different ideas for new products past their common
manager two levels above them in the organization. The marketer comes first,
with an idea for a higher-capacity, higher-speed model. The two-levels-up
manager starts her interrogation:
“Who’s going to buy it?”
“Well, there’s a whole segment in the workstation industry—they buy
over $600 million in drives each year—that we’ve just never been able to
reach because our capacity points just don’t reach that high. I think this
product just might get us there.”
“Have you run this idea past any potential customers?”
“Yeah, I was in California last week. They all said they wanted prototypes
as soon as they could get them. There’s a design window opening up in
nine months. They’ve been working with their current supplier
[competitor X] to get something ready, but someone we just hired from
competitor X said they’re having lots of trouble meeting the specs. I really
think we can do it.”
“But does engineering think we can do it?”
“They say it’ll be a stretch, but you know them. They always say that.”
“What kind of margins are we looking at up there?”
“That’s what really excites me about this. If we can build it in our current
factory, given the price per megabyte competitor X has been getting, I
think we can get close to 35 percent.”
Compare that conversation to the manager’s interchange with the engineer
whose idea is for a cheaper, smaller, slower, lower-capacity disruptive disk
drive.
“Who’s going to buy it?”
“Well, I’m not sure, but there’s got to be a market out there somewhere
for it. People are always wanting things smaller and less expensive. I
could see them using it in fax machines, printers, maybe.”
“Have you run this idea past any potential customers?”
“Have you run this idea past any potential customers?”
“Yeah, when I was at the last trade show I sketched the idea out for one of
our current customers. He said he was interested, but couldn’t see how
they could really use it. Today you really need 270 MB to run everything,
and there’s just no way we could get that kind of capacity on this thing—
at least not for a while. His response doesn’t surprise me, really.”
“How about the guys who make fax machines? What do they think?”
“Well, they say they don’t know. Again, it’s an intriguing idea, but they
already have their product plans pretty well set, and none of them use disk
drives.”
“You think we could make money on this project?”
“Well, I think so, but that depends on how we could price it, of course.”
Which of the two projects will the two-levels-up manager back? In the tugof-war for development resources, projects targeted at the explicit needs of
current customers or at the needs of existing users that a supplier has not yet
been able to reach will always win over proposals to develop products for
markets that do not exist. This is because, in fact, the best resource allocation
systems are designed precisely to weed out ideas that are unlikely to find large,
profitable, receptive markets. Any company that doesn’t have a systematic way
of targeting its development resources toward customers’ needs, in fact, will fail.
3
The most vexing managerial aspect of this problem of asymmetry, where the
easiest path to growth and profit is up, and the most deadly attacks come from
below, is that “good” management—working harder and smarter and being more
visionary—doesn’t solve the problem. The resource allocation process involves
thousands of decisions, some subtle and some explicit, made every day by
hundreds of people, about how their time and the company’s money ought to be
spent. Even when a senior manager decides to pursue a disruptive technology,
the people in the organization are likely to ignore it or, at best, cooperate
reluctantly if it doesn’t fit their model of what it takes to succeed as an
organization and as individuals within an organization. Well-run companies are
not populated by yes-people who have been taught to carry out mindlessly the
directives of management. Rather, their employees have been trained to
understand what is good for the company and what it takes to build a successful
career within the company. Employees of great companies exercise initiative to
serve customers and meet budgeted sales and profits. It is very difficult for a
manager to motivate competent people to energetically and persistently pursue a
course of action that they think makes no sense. An example from the history of
the disk drive industry illustrates the impact of such employee behavior.
THE CASE OF THE 1.8-INCH DISK DRIVE
Managers in disk drive companies were very generous in helping me conduct the
research reported in this book, and, as the results began emerging in 1992, I
began feeding back the published papers that summarized what I was learning. I
was particularly interested in whether the framework summarized in Figure 1.7
would have an impact on their decisions regarding the 1.8-inch drive, which was
just then emerging as the industry’s most recent disruptive technology. For
industry outsiders, of course, the conclusion was obvious: “How many times
does this have to happen before these guys learn?! Of course they’ve got to do
it.” The guys did, in fact, learn. By the end of 1993, each of the leading drive
makers had developed 1.8-inch models and had them ready for introduction if
and when the market developed.
In August 1994, I was visiting the CEO of one of the largest disk drive
companies and asked him what his firm was doing about the 1.8-inch drive. This
clearly touched a hot button. He pointed to a shelf in his office where a sample
1.8-inch drive was perched. “You see that?” he demanded. “That’s the fourth
generation of 1.8-inch drives we’ve developed—each one with more capacity
than the last. But we haven’t sold any. We want to be ready when the market is
there, but there just isn’t a market for them yet.”
I countered by reminding him that Disk/Trend Report, a highly regarded
market research publication that was the source of much of the data used in my
study, had measured the 1993 market at $40 million, was projecting 1994 sales
to be $80 million, and forecast 1995 volume at $140 million.
“I know that’s what they think,” he responded. “But they’re wrong. There
isn’t a market. We’ve had that drive in our catalog for 18 months. Everyone
knows we’ve got it, but nobody wants it. The market just isn’t there. We just got
way ahead of the market.” I had no other basis for pressing my point with this
manager, who is one of the most astute managers I’ve ever met. Our
conversation moved to other issues.
About a month later I was leading a case discussion in the Harvard MBA
program’s technology and operations management course about the development
of a new engine at Honda. One of the students in the class had previously
worked in Honda’s research and development organization, so I asked him to
take a few minutes to tell the class what it was like working there. It turned out
that he had been working on dashboard mapping and navigation systems. I
that he had been working on dashboard mapping and navigation systems. I
couldn’t resist interrupting his talk by asking, “How do you store all that data for
the maps?”
Said the student: “We found a little 1.8-inch disk drive and put it in there. It’s
really neat—almost a solid-state device, with very few moving parts. Really
rugged.”
“Who do you buy them from?” I pressed.
“It’s kind of funny,” he replied. “You can’t buy them from any of the big
disk drive companies. We get them from a little startup company somewhere in
Colorado—I can’t remember the name.”
I have since reflected on why the head of this company would insist so
stubbornly that there was no market for 1.8-inch drives, even while there was,
and why my student would say the big drive makers didn’t sell these drives,
even though they were trying. The answer lies in the northeast-southeast
problem, and in the role that the hundreds of well-trained decision makers in a
good company play in funneling resources and energy into those projects they
perceive will bring the company the greatest growth and profit. The CEO had
decided that the company was going to catch this next disruptive wave early and
had shepherded the project through to a successful, economical design. But
among the employees, there was nothing about an $80 million, low-end market
that solved the growth and profit problems of a multibillion dollar company—
especially when capable competitors were doing all they could to steal away the
customers providing those billions. (The revenue figure is disguised.) And way
at the other end of the company, there was nothing about supplying prototype
quantities of 1.8-inch drives to an automaker that solved the problem of meeting
the 1994 quotas of salespeople whose contacts and expertise were based so
solidly in the computer industry.
For an organization to accomplish a task as complex as launching a new
product, logic, energy, and impetus must all coalesce behind the effort. Hence, it
is not just the customers of an established firm that hold it captive to their needs.
Established firms are also captive to the financial structure and organizational
culture inherent in the value network in which they compete—a captivity that
can block any rationale for timely investment in the next wave of disruptive
technology.
VALUE NETWORKS AND MARKET VISIBILITY
The impetus to drift upmarket can be particularly powerful when a firm’s
customers themselves are migrating upmarket. In such circumstances, suppliers
of an intermediate component such as a disk drive may not sense their
northeasterly migration because they are embedded among competitors and
customers experiencing a similar drift.
In this light, we can see how easy it would have been for the leading 8-inch
disk drive makers—Priam, Quantum, and Shugart—to miss the 5.25-inch
generation of drives. Not a single one of their core customers, for example,
Digital Equipment, Prime Computer, Data General, Wang Laboratories, and
Nixdorf, successfully introduced a desktop computer. Instead, each was moving
upmarket itself toward ever higher performance segments of their markets,
trying to win the business of customers who historically had used mainframes.
Similarly, not a single one of the customers of the 14-inch drive makers—
mainframe makers such as Univac, Burroughs, NCR, ICL, Siemens, and Amdahl
—ever made a bold enough move downmarket into minicomputers to become a
significant player there.
Three factors—the promise of upmarket margins, the simultaneous upmarket
movement of many of a company’s customers, and the difficulty of cutting costs
to move downmarket profitably—together create powerful barriers to downward
mobility. In the internal debates about resource allocation for new product
development, therefore, proposals to pursue disruptive technologies generally
lose out to proposals to move upmarket. In fact, cultivating a systematic
approach to weeding out new product development initiatives that would likely
lower profits is one of the most important achievements of any well-managed
company.
An important strategic implication of this rational pattern of upmarket
movement is that it can create vacuum in low-end value networks that draws in
entrants with technologies and cost structures better suited to competition. One
of these powerful downmarket voids occurred in the steel industry, for example,
when entrant companies employing disruptive minimill process technology
entered through low-end beachheads; they have attacked relentlessly upmarket
ever since.
THE NORTHEASTERLY MIGRATION OF INTEGRATED STEEL
Minimill steel making first became commercially viable in the mid-1960s.
Employing widely available and familiar technology and equipment, minimills
melt scrap steel in electric arc furnaces, continuously cast it into intermediate
shapes called billets, and then roll those into products such as bars, rods, beams,
or sheets. They are called minimills because the scale at which they produce
cost-competitive molten steel from scrap is less than one-tenth of the scale
required for an integrated mill to produce cost-competitive molten steel from
iron ore in blast and basic oxygen furnaces. (Integrated mills take their name
from the integrated process of transforming iron ore, coal, and limestone into
final steel shapes.) Integrated mills and minimills look much the same in their
processes of continuous casting and rolling operations. Scale is the only
difference: The output of efficiently sized blast furnaces requires that integrated
mills’ casting and rolling operations must be much greater than those of the
minimills.
North America’s steel minimills are the most efficient, lowest-cost steel
makers in the world. In 1995, the most efficient minimill required 0.6 laborhours per ton of steel produced; the best integrated mill required 2.3 labor-hours.
In the product categories in which they compete, the average minimill can make
product of equivalent quality, on a fully costed basis, at about a 15 percent lower
cost than the average integrated mill. In 1995, it cost about $400 million to build
a cost-competitive steel minimill and about $6 billion to build a cost-competitive
integrated mill. 4 In terms of capital cost per ton of steel making capacity,
integrated mills are more than four times as costly to build. 5 As a result,
minimills’ share of the North American market has grown from nothing in 1965
to 19 percent in 1975, 32 percent in 1985, and 40 percent in 1995. Experts
predict they will account for half of all steel production by the turn of the
century. 6 Minimills virtually dominate the North American markets for rods,
bars, and structural beams.
Yet not a single one of the world’s major integrated steel companies to date
has built a mill employing minimill technology. Why would none of them do
something that makes so much sense? The explanation forwarded most
frequently by the business press, especially in the United States, is that the
managers of the integrated companies are conservative, backward-looking, riskaverse, and incompetent. Consider these indictments.
averse, and incompetent. Consider these indictments.
Last year, U.S. Steel Corp. closed fifteen of its facilities, claiming they
had become “noncompetitive.” Three years ago, Bethlehem Steel Corp.
shuttered major portions of its plants in Johnstown, PA, and Lackawanna,
NY…. The closing of these major steel complexes is the final dramatic
concession from today’s chief executives that management has not been
doing its job. It represents decades of maximizing profits to look good for
the short term. 7
If the U.S. steel industry were as productive in tons per man-hour as it is
in rhetoric per problem, it would be a top-notch performer. 8
Surely there is some credibility to such accusations. But managerial
incompetence cannot be a complete answer for the failure of North American
integrated mills to counter the conquest by minimills of vast portions of the steel
industry. None of what most experts regard as the best-managed and most
successful of the world’s integrated steel makers— including Nippon, Kawasaki,
and NKK in Japan; British Steel and Hoogovens in Europe; and Pohang Steel in
Korea—has invested in minimill technology even though it is demonstrably the
lowest-cost technology in the world.
At the same time, in the last decade the management teams at integrated mills
have taken aggressive steps to increase mill efficiency. USX, for example,
improved the efficiency of its steel making operations from more than nine
labor-hours per ton of steel produced in 1980 to just under three hours per ton in
1991. It accomplished this by ferociously attacking the size of its workforce,
paring it from more than 93,000 in 1980 to fewer than 23,000 in 1991, and by
investing more than $2 billion in modernizing its plant and equipment. Yet all of
this managerial aggressiveness was targeted at conventional ways of making
steel. How can this be?
Minimill steelmaking is a disruptive technology. When it emerged in the
1960s, because it used scrap steel, it produced steel of marginal quality. The
properties of its products varied according to the metallurgical composition and
impurities of the scrap. Hence, about the only market that minimill producers
could address was that for steel reinforcing bars (rebars)—right at the bottom of
the market in terms of quality, cost, and margins. This market was the least
attractive of those served by established steel makers. And not only were
margins low, but customers were the least loyal: They would switch suppliers at
margins low, but customers were the least loyal: They would switch suppliers at
will, dealing with whoever offered the lowest price. The integrated steel makers
were almost relieved to be rid of the rebar business.
The minimills, however, saw the rebar market quite differently. They had
very different cost structures than those of the integrated mills: little depreciation
and no research and development costs, low sales expenses (mostly telephone
bills), and minimal general managerial overhead. They could sell by telephone
virtually all the steel they could make—and sell it profitably.
Once they had established themselves in the rebar market, the most
aggressive minimills, especially Nucor and Chaparral, developed a very different
view of the overall steel market than the view that the integrated mills held.
Whereas the downmarket rebar territory they seized had looked singularly
unattractive to their integrated competitors, the minimills’ view upmarket
showed that opportunities for greater profits and expanded sales were all above
them. With such incentive, they worked to improve the metallurgical quality and
consistency of their products and invested in equipment to make larger shapes.
As the trajectory map in Figure 4.3 indicates, the minimills next attacked the
markets for larger bars, rods, and angle irons immediately above them. By 1980,
they had captured 90 percent of the rebar market and held about 30 percent of
the markets for bars, rods, and angle irons. At the time of the minimills’ attack,
the bar, rod, and angle iron shapes brought the lowest margins in the integrated
mills’ product lines. As a consequence, the integrated steel makers were, again,
almost relieved to be rid of the business, and by the mid-1980s this market
belonged to the minimills.
Once their position in the market for bars, rods, and angle irons seemed
secure, the minimills continued their march upmarket, this time toward structural
beams. Nucor did so from a new minimill plant in Arkansas, and Chaparral
launched its attack from a new mill adjacent to its first one in Texas. The
integrated mills were driven from this market by the minimills as well. In 1992,
USX closed its South Chicago structural steel mill, leaving Bethlehem as the
only integrated North American structural steel maker. Bethlehem closed its last
structural beam plant in 1995, leaving the field to the minimills.
Figure 4.3 The Progress of Disruptive Minimill Steel Technology
An important part of this story is that, throughout the 1980s, as they were
ceding the bar and beam business to the minimills, the integrated steel makers
experienced dramatically improving profit. Not only were these firms attacking
cost, they were forsaking their lowest-margin products and focusing increasingly
on high-quality rolled sheet steel, where quality-sensitive manufacturers of cans,
cars, and appliances paid premium prices for metallurgically consistent steel
with defect-free surfaces. Indeed, the lion’s share of integrated mills’
investments in the 1980s had been targeted at improving their ability to provide
the most demanding customers in these three markets with the highest-quality
product and to do so profitably. Sheet steel markets were an attractive haven for
the integrated producers in part because they were protected from minimill
competition. It cost about $2 billion to build a state-of-the-art, cost-competitive
sheet steel rolling mill, and this capital outlay simply had been too much for
even the largest of the minimills.
Targeting the premium end of the market pleased the integrated mills’
investors: For example, Bethlehem Steel’s market value had leapt from $175
million in 1986 to $2.4 billion in 1989. This represented a very attractive return
on the $1.3 billion the company invested in R&D and plant and equipment
during this period. The business press generously acknowledged these
aggressive, well-placed investments.
aggressive, well-placed investments.
Walter Williams (Bethlehem’s CEO) has worked wonders. Over the past
three years he mounted a highly personal campaign to improve the quality
and productivity of Bethlehem’s basic steel business. Bethlehem’s
metamorphosis has outclassed even its major U.S. competitors—which as
a whole are now producing at lower costs than their Japanese rivals and
are fast closing the quality gap. Customers notice the difference. “It’s
nothing short of miraculous,” says a top purchaser of sheet steel at
Campbell Soup. [Italics added.] 9
Another analyst made similar observations.
While almost no one was looking, a near miracle occurred: Big Steel is
making a quiet comeback. Gary Works (US Steel) is back in the black …
pouring out a glowing river of molten iron at the rate of 3 million tons per
year—a North American record. Union-management problem-solving
teams are everywhere. Instead of making steel in all shapes and sizes,
Gary has focused almost entirely on higher-value flat-rolled steel. [Italics
added.] 10
Almost all of us would agree that these remarkable recoveries were the fruits
of good management. But where will good management in this genre lead these
firms?
MINIMILL THIN-SLAB CASTING FOR SHEET STEEL
While integrated steel makers were busy engineering their recoveries, more
disruptive clouds began gathering on the horizon. In 1987, a German supplier of
equipment for the steel industry, Schloemann-Siemag AG, announced that it had
developed what it called “continuous thin-slab casting” technology—a way for
steel to be continuously cast from its molten state into long, thin slabs that could
be transported directly, without cooling, into a rolling mill. Rolling the whitehot, already thin slab of steel to the final thickness of coiled sheet steel was
much simpler than the traditional task mastered by the integrated mills of
reheating and rolling sheet from thick ingots or slabs. Most important, a costcompetitive continuous thin-slab casting and rolling mill could be built for less
than $250 million—one-tenth the capital cost of a traditional sheet mill and a
relatively manageable investment for a minimill steel maker. At this scale, an
electric arc furnace could easily supply the required quantity of molten steel.
Moreover, thin-slab casting promised at least a 20 percent reduction in the total
cost of making sheet steel.
Because of its promise, thin-slab casting was carefully evaluated by every
major player in the steel industry. Some integrated mills, such as USX, worked
very hard to justify installation of a thin-slab facility. 11 In the end, however, it
was minimill Nucor Steel, rather than the integrated mills, that made the bold
move into thin-slab casting. Why?
At the outset, thin-slab casting technology could not offer the smooth, defectfree surface finish required by the integrated mills’ mainstream customers
(makers of cans, cars, and appliances). The only markets were those such as
construction decking and corrugated steel for culverts, pipes, and Quonset huts,
in which users were more sensitive to price than to surface blemishes. Thin-slab
casting was a disruptive technology. Furthermore, large, capable, and hungry
integrated competitors were busy trying to rob each other’s most profitable
business with the large auto, appliance, and can companies. It made no sense for
them to target capital investment at thin-slab casting, positioned as it was in the
least-profitable, most price-competitive and commodity-like end of their
business. Indeed, after seriously considering between 1987 and 1988 whether to
invest in thin-slab casting at an amount then projected to be about $150 million,
both Bethlehem and USX elected instead to invest in conventional thick-slab
continuous casters at a cost of $250 million to protect and enhance the
profitability of the business with their mainstream customers.
Not surprisingly, Nucor saw the situation another way. Unencumbered by the
demands of profitable customers in the sheet steel business and benefiting from a
cost structure forged at the bottom of the industry, Nucor fired up the world’s
first continuous thin-slab casting facility in Crawfordsville, Indiana, in 1989, and
constructed a second mill in Hickman, Arkansas, in 1992. It increased its
capacity at both sites by 80 percent in 1995. Analysts estimate that Nucor had
captured 7 percent of the massive North American sheet market by 1996—
hardly enough to concern the integrated mills, because Nucor’s success has been
limited to the commoditized, least-profitable end of their product line. Of course,
in its effort to win higher-margin business with higher-quality products from
these mills, Nucor has already improved the surface quality of its sheet steel
substantially.
Thus, the integrated steel companies’ march to the profitable northeast corner
of the steel industry is a story of aggressive investment, rational decision
making, close attention to the needs of mainstream customers, and record profits.
It is the same innovator’s dilemma that confounded the leading providers of disk
drives and mechanical excavators: Sound managerial decisions are at the very
root of their impending fall from industry leadership.
NOTES
1. This process of moving to higher tiers of the market and then adding the costs
to support business at that level was described by Professor Malcom P.
McNair, of the Harvard Business School, in a way that strikingly parallels the
disk drive story. Writing in a history of retailing, McNair describes how
successive waves of retailers entered the field with disruptive technologies
(though he does not use the term):
The wheel always revolves, sometimes slowly, sometimes more rapidly,
but it does not stand still. The cycle frequently begins with the bold new
concept, the innovation. Somebody gets a bright new idea. There is a John
Wanamaker, a George Hartford (A&P), a Frank Woolworth, a W. T.
Grant, a General Wood (Sears), a Michael Cullen (supermarkets), a
Eugene Ferkauf. Such an innovator has an idea for a new kind of
distributive enterprise. At the outset he is in bad odor, ridiculed, scorned,
condemned as “illegitimate.” Bankers and investors are leery of him. But
he attracts the public on the basis of the price appeal made possible by the
low operating costs inherent in his innovation. As he goes along he trades
up, improves the quality of his merchandise, improves the appearance and
standing of his store, attains greater respectability….
During this process of growth the institution rapidly becomes
respectable in the eyes of both consumers and investors, but at the same
time its capital investment increases and its operating costs tend to rise.
Then the institution enters the stage of maturity…. The maturity phase
soon tends to be followed by topheaviness … and eventual vulnerability.
Vulnerability to what? Vulnerability to the next fellow who has a bright
idea and who starts his business on a low-cost basis, slipping in under the
umbrella that the old-line institutions have hoisted.
See Malcom P. McNair, “Significant Trends and Developments in the PostWar Period,” in Albert B. Smith, ed., Competitive Distribution in a Free
High-Level Economy and Its Implications for the University (Pittsburgh:
University of Pittsburgh Press, 1958) 17–18. In other words, the very costs
required to become competitive in higher-end markets restrict downward
mobility and create further incentive to move upmarket.
2. Joseph Bower, Managing the Resource Allocation Process (Homewood, IL:
Richard D. Irwin, 1970).
3. The use of the term systematic in this sentence is important, because most
resource allocation systems work in a systematic way—whether the system is
formal or informal. It will be shown later in this book that a key to managers’
ability to confront disruptive technology successfully is their ability to
intervene and make resource allocation decisions personally and persistently.
Allocation systems are designed to weed out just such proposals as disruptive
technologies. An excellent description of this dilemma can be found in Roger
Martin, “Changing the Mind of the Corporation,” Harvard Business Review,
November–December 1993, 81–94.
4. Because of slow growth in steel demand in many of the world’s markets,
fewer large integrated steel mills are being built in the 1990s. Those integrated
mills that are being built these days are in high-growth, rapidly developing
countries such as Korea, Mexico, and Brazil.
5. Professor Thomas Eagar of the Department of Materials Science at the
Massachusetts Institute of Technology provided these estimates.
6. “The U.S. Steel Industry: An Historical Overview,” Goldman Sachs U.S.
Research Report, 1995.
7. “What Caused the Decline,” Business Week, June 30, 1980, 74.
8. Donald B. Thompson, “Are Steel’s Woes Just Short-term,” Industry Week,
February 22, 1982, 31.
9. Gregory L. Miles, “Forging the New Bethlehem,” Business Week, June 5,
1989, 108–110.
10. Seth Lubove and James R. Norman, “New Lease on Life,” Forbes, May 9,
1994, 87.
11. The experience of the team at U.S. Steel charged with evaluating continuous
thin-slab casting technology is chronicled in the Harvard Business School
teaching case “Continuous Casting Investments at USX Corporation,” No.
697-020.
Part Two
MANAGING DISRUPTIVE
TECHNOLOGICAL CHANGE
In the search for reasons why so many strong companies in three very different
industries stumbled or failed, the research summarized in the preceding chapters
casts doubt on several conventional explanations other researchers have offered.
It wasn’t the case that the leading companies’ engineers tended to get stuck in a
particular technological paradigm or ignored innovations that were “not invented
here.” The cause of failure could not be solely attributed to established firms’
inadequate competence in new technological fields or their inability to stay atop
their industry’s “technological mudslide.” Of course, these problems do afflict
some companies. But as a general rule, the evidence is very strong that as long
as the new technology was required to address the needs of their customers,
established firms were able to muster the expertise, capital, suppliers, energy,
and rationale to develop and implement the requisite technology both
competitively and effectively. This has been true for incremental as well as
radical advances; for projects that consumed months as well as those lasting
more than a decade; in fast-paced disk drives, in the slower-paced mechanical
excavator industry, and in the process-intensive steel industry.
Probably the most important outcome of this attempt to define the problem is
that it ruled out poor management as a root cause. Again, this is not to say that
good and bad management aren’t key factors affecting the fortunes of firms. But
as a general explanation, the managers of the companies studied here had a great
track record in understanding customers’ future needs, identifying which
technologies could best address those needs, and in investing to develop and
implement them. It was only when confronted with disruptive technology that
they failed. There had, therefore, to be a reason why good managers consistently
made wrong decisions when faced with disruptive technological change.
The reason is that good management itself was the root cause. Managers
played the game the way it was supposed to be played. The very decisionmaking and resource-allocation processes that are key to the success of
established companies are the very processes that reject disruptive technologies:
listening carefully to customers; tracking competitors’ actions carefully; and
investing resources to design and build higher-performance, higher-quality
products that will yield greater profit. These are the reasons why great firms
stumbled or failed when confronted with disruptive technological change.
Successful companies want their resources to be focused on activities that
address customers’ needs, that promise higher profits, that are technologically
feasible, and that help them play in substantial markets. Yet, to expect the
processes that accomplish these things also to do something like nurturing
disruptive technologies—to focus resources on proposals that customers reject,
that offer lower profit, that underperform existing technologies and can only be
sold in insignificant markets—is akin to flapping one’s arms with wings
strapped to them in an attempt to fly. Such expectations involve fighting some
fundamental tendencies about the way successful organizations work and about
how their performance is evaluated.
Part Two of this book is built upon detailed case studies of a few companies
that succeeded, and many more that failed, when faced with disruptive
technological change. Just as in our analogy to man’s finally learning to fly
when aviators ultimately came to understand and either harness or accommodate
some fundamental laws of nature, these case studies show that those executives
who succeeded tended to manage by a very different set of rules than those that
failed. There were, in fact, five fundamental principles of organizational nature
that managers in the successful firms consistently recognized and harnessed. The
firms that lost their battles with disruptive technologies chose to ignore or fight
them. These principles are:
1. Resource dependence: Customers effectively control the patterns of
resource allocation in well-run companies.
2. Small markets don’t solve the growth needs of large companies.
3. The ultimate uses or applications for disruptive technologies are
unknowable in advance. Failure is an intrinsic step toward success.
4. Organizations have capabilities that exist independently of the capabilities
of the people who work within them. Organizations’ capabilities reside in
their processes and their values—and the very processes and values that
constitute their core capabilities within the current business model also
define their disabilities when confronted with disruption.
5. Technology supply may not equal market demand. The attributes that make
disruptive technologies unattractive in established markets often are the
very ones that constitute their greatest value in emerging markets.
How did the successful managers harness these principles to their advantage?
1. They embedded projects to develop and commercialize disruptive
technologies within an organization whose customers needed them. When
managers aligned a disruptive innovation with the “right” customers,
customer demand increased the probability that the innovation would get
the resources it needed.
2. They placed projects to develop disruptive technologies in organizations
small enough to get excited about small opportunities and small wins.
3. They planned to fail early and inexpensively in the search for the market for
a disruptive technology. They found that their markets generally coalesced
through an iterative process of trial, learning, and trial again.
4. They utilized some of the resources of the mainstream organization to
address the disruption, but they were careful not to leverage its processes
and values. They created different ways of working within an organization
whose values and cost structure were turned to the disruptive task at hand.
5. When commercializing disruptive technologies, they found or developed
new markets that valued the attributes of the disruptive products, rather than
search for a technological breakthrough so that the disruptive product could
compete as a sustaining technology in mainstream markets.
Chapters 5 through 9 in Part Two describe in more detail how managers can
address and harness these four principles. Each chapter starts by examining how
harnessing or ignoring these principles affected the fortunes of disk drive
companies when disruptive technologies were emerging.1 Each chapter then
branches into an industry with very different characteristics, to show how the
same principles drove the success and failure of firms confronted with disruptive
technologies there.
The sum of these studies is that while disruptive technology can change the
dynamics of industries with widely varying characteristics, the drivers of success
or failure when confronted by such technology are consistent across industries.
or failure when confronted by such technology are consistent across industries.
Chapter 10 shows how these principles can be used by illustrating how
managers might apply them in a case study of a particularly vexing technology
—the electric vehicle. Chapter 11 then reviews the principal findings of the
book.
NOTES
1. The notion that we exercise power most effectively when we understand the
physical and psychological laws that define the way the world works and then
position or align ourselves in harmony with those laws, is of course not new to
this book. At a light-hearted level, Stanford Professor Robert Burgelman,
whose work is extensively cited in ths book, once dropped his pen onto the
floor in a lecture. He muttered as he stooped to pick it up, “I hate gravity.”
Then, as he walked to the blackboard to continue his line of thought, he
added, “But do you know what? Gravity doesn’t care! It will always pull
things down, and I may as well plan on it.”
At a more serious level, the desirability of aligning our actions with the
amore powerful laws of nature, society, and psychology, in order to lead a
productive life, is a central theme in many works, particularly the ancient
Chinese classic, Tao te Ching.
CHAPTER FIVE
Give Responsibility for Disruptive Technologies
to Organizations Whose Customers Need Them
Most executives would like to believe that they’re in charge of their
organizations, that they make the crucial decisions and that when they decide
that something should be done everyone snaps to and executes. This chapter
expands on the view already introduced: that in practice, it is a company’s
customers who effectively control what it can and cannot do. As we have seen in
the disk drive industry, companies were willing to bet enormous amounts on
technologically risky projects when it was clear that their customers needed the
resulting products.
But they were unable to muster the wherewithal to
execute much simpler disruptive projects if existing,
profitable customers didn’t need the products.
This observation supports a somewhat controversial theory called resource
dependence, propounded by a minority of management scholars, 1 which posits
that companies’ freedom of action is limited to satisfying the needs of those
entities outside the firm (customers and investors, primarily) that give it the
resources it needs to survive. Drawing heavily upon concepts from biological
evolution, resource dependence theorists assert that organizations will survive
and prosper only if their staffs and systems serve the needs of customers and
investors by providing them with the products, services, and profit they require.
Organizations that do not will ultimately die off, starved of the revenues they
need to survive.
2
Hence, through this survival-of-the-fittest mechanism,
those firms that rise to prominence in their industries
generally will be those whose people and processes are
most keenly tuned to giving their customers what they
want. The controversy with this theory arises when its
proponents conclude that managers are powerless to
change the courses of their firms against the dictates of
their customers. Even if a manager has a bold vision to
take her or his company in a very different direction, the
power of the customer-focused people and processes in
any company well-adapted to survival in its competitive
environment will reject the manager’s attempts to change
direction. Therefore, because they
provide the resources upon which the firm is dependent,
it is the customers, rather than the managers, who really
determine what a firm will do. It is forces outside the
organization, rather than the managers within it, that
dictate the company’s
course. Resource dependence theorists conclude that the
real role of managers in companies whose people and
systems are well-adapted to survival is, therefore, only a
symbolic one.
For those of us who have managed companies, consulted for management, or
taught future managers, this is a most disquieting thought. We are there to
taught future managers, this is a most disquieting thought. We are there to
manage, to make a difference, to formulate and implement strategy, to accelerate
growth and improve profits. Resource dependence violates our very reason for
being. Nonetheless, the findings reported in this book provide rather stunning
support for the theory of resource dependence—especially for the notion that the
customer-focused resource allocation and decision-making processes of
successful companies are far more powerful in directing investments than are
executives’
decisions.
Clearly, customers wield enormous power in directing a firm’s investments.
What, then, should managers do when faced with a disruptive technology that
the company’s customers explicitly do not want? One option is to convince
everyone in the firm that the company should pursue it anyway, that it has longterm strategic importance despite rejection by the customers who pay the bills
and despite lower profitability than the upmarket alternatives. The other option
would be to create an independent organization and embed it among emerging
customers that do need the technology. Which works best?
Managers who choose the first option essentially are picking a fight with a
powerful tendency of organizational nature—that customers, not managers,
essentially control the investment patterns of a company. By contrast, managers
who choose the second option align themselves with this tendency, harnessing
rather than fighting its power. The cases presented
in this chapter provide strong evidence that the second
option offers far higher probabilities of success than the
first.
INNOVATION AND RESOURCE ALLOCATION
The mechanism through which customers control the investments of a firm is the
resource allocation process—the process that determines which initiatives get
staff and money and which don’t. Resource allocation and innovation are two
sides of the same coin: Only those new product development projects that do get
adequate funding, staffing, and management attention have a chance to succeed;
those that are starved of resources will languish. Hence, the patterns of
innovation in a company will mirror quite closely the patterns in which resources
are allocated.
Good resource allocation processes are designed to weed out proposals that
customers don’t want. When these decision-making processes work well, if
customers don’t want a product, it won’t get funded; if they do want it, it will.
This is how things must work in great companies. They must invest in things
customers want—and the better they become at doing this, the more successful
they will be.
As we saw in chapter 4, resource allocation is not simply a matter of topdown decision making followed by implementation. Typically, senior managers
are asked to decide whether to fund a project only after many others at lower
levels in the organization have already decided which types of project proposals
they want to package and send on to senior management for approval and which
they don’t think are worth the effort. Senior managers typically see only a wellscreened subset of the innovative ideas generated. 3
And even after senior management has endorsed funding for a particular
project, it is rarely a “done deal.” Many crucial resource allocation decisions are
made after project approval—indeed, after product launch—by mid-level
managers who set priorities when multiple projects and products compete for the
time of the same people, equipment, and vendors. As management scholar
Chester Barnard has noted:
From the point of view of the relative importance of specific decisions,
those of executives properly call for first attention. But from the point of
view of aggregate importance, it is not decisions of executives, but of
non-executive participants in organizations which should enlist major
interest. [Italics added.] 4
So how do non-executive participants make their resource allocation
decisions? They decide which projects they will propose to senior management
and which they will give priority to, based upon their understanding of what
types of customers and products are most profitable to the company. Tightly
coupled with this is their view of how their sponsorship of different proposals
will affect their own career trajectories within the company, a view that is
formed heavily by their understanding of what customers want and what types of
products the company needs to sell more of in order to be more profitable.
Individuals’ career trajectories can soar when they sponsor highly profitable
innovation programs. It is through these mechanisms of seeking corporate profit
and personal success, therefore, that customers exert a profound influence on the
process of resource allocation, and hence on the patterns of innovation, in most
companies.
SUCCESS IN DISRUPTIVE DISK DRIVE TECHNOLOGY
It is possible to break out of this system of customer control, however. Three
cases in the history of the disk drive industry demonstrate how managers can
develop strong market positions in a disruptive technology. In two cases,
managers harnessed, rather than fought, the forces of resource dependence: They
spun out independent companies to commercialize the disruptive technology. In
the third, the manager chose to fight these forces, and survived the project,
exhausted.
Quantum and Plus Development
As we have seen, Quantum Corporation, a leading maker of 8-inch drives sold in
the minicomputer market in the early 1980s, completely missed the advent of
5.25-inch drives: It introduced its first versions nearly four years after those
drives first appeared in the market. As the 5.25-inch pioneers began to invade
the minicomputer market from below, for all the reasons already described,
Quantum’s sales began to sag.
In 1984 several Quantum employees saw a potential market for a thin 3.5inch drive plugged into an expansion slot in IBM XT-and AT-class desktop
computers—drives that would be sold to personal computer users rather than the
OEM minicomputer manufacturers that had accounted for all of Quantum’s
revenue. They determined to leave Quantum and start a new firm to
commercialize their idea.
Rather than let them leave unencumbered, however, Quantum’s executives
financed and retained 80 percent ownership of this spinoff venture, called Plus
Development Corporation, and set the company up in different facilities. It was a
completely self-sufficient organization, with its own executive staff and all of
the functional capabilities required in an independent company. Plus was
extremely successful. It designed and marketed its drives but had them
manufactured under contract by Matsushita Kotobuki Electronics (MKE) in
Japan.
As sales of Quantum’s line of 8-inch drives began to evaporate in the mid1980s, they were offset by Plus’s growing “Hardcard” revenues. By 1987, sales
of Quantum’s 8-and 5.25-inch products had largely disappeared. Quantum then
purchased the remaining 20 percent of Plus, essentially closed down the old
corporation, and installed Plus’s executives in Quantum’s most senior positions.
They then reconfigured Plus’s 3.5-inch products to appeal to OEM desktop
computer makers, such as Apple, just as the capacity vector for 3.5-inch drives
was invading the desktop market, as shown in the disk drive trajectory map in
Figure 1.7. Quantum, thus reconstituted as a 3.5-inch drive maker, has
aggressively adopted sustaining component technology innovations, moving
upmarket toward engineering workstations, and has also successfully negotiated
the sustaining architectural innovation into 2.5-inch drives. By 1994 the new
Quantum had become the largest unit-volume producer of disk drives in the
world. 5
Control Data in Oklahoma
Control Data Corporation (CDC) effected the same self-reconstitution— once.
CDC was the dominant manufacturer of 14-inch drives sold into the OEM
market between 1965 and 1982; its market share fluctuated between 55 and 62
percent. When the 8-inch architecture emerged in the late 1970s, however, CDC
missed it—by three years. The company never captured more than a fraction of
the 8-inch market, and those 8-inch drives that it did sell were sold almost
exclusively to defend its established customer base of mainframe computer
manufacturers. The reason was resources and managerial emphasis: Engineers
and marketers at the company’s principal Minneapolis facility kept getting
pulled off the 8-inch program to resolve problems in the launch of nextgeneration 14-inch products for CDC’s mainstream customers.
CDC launched its first 5.25-inch model two years after Seagate’s pioneering
product appeared in 1980. This time, however, CDC
located its 5.25-inch effort in Oklahoma City. This was
done, according to one manager, “not to escape CDC’s
Minneapolis engineering culture, but to isolate the [5.25inch product] group from the company’s mainstream
customers.” Although it was late in the market and never
regained its former dominant position, CDC’s foray into
5.25-inch drives was profitable, and at times the firm
commanded a 20 percent share of higher-capacity 5.25inch drives.
Micropolis: Transition by Managerial Force
Micropolis Corporation, an early disk drive leader founded in 1978 to make 8inch drives, was the only other industry player to successfully make the
transition to a disruptive platform. It did not use the spin-out strategy that had
worked for Quantum and Control Data, however, choosing instead to manage
the change from within the mainstream company. But even this exception
supports the rule that customers exert exceptionally powerful influence over the
investments that firms can undertake successfully.
Micropolis began to change in 1982, when founder and CEO Stuart Mabon
intuitively perceived the trajectories of market demand and technology supply
mapped in Figure 1.7 and decided that the firm should become primarily a maker
of 5.25-inch drives. While initially hoping to keep adequate resources focused
on developing its next generation of 8-inch drives so that Micropolis could
straddle both markets, 6 he assigned the company’s premier engineers to the
5.25-inch program. Mabon recalls that it took “100 percent of my time and
energy for eighteen months” to keep adequate resources focused on the 5.25inch program, because the organization’s own mechanisms allocated resources
to where the customers were—8-inch drives.
By 1984, Micropolis had failed to keep pace with competition in the
minicomputer market for disk drives and withdrew its remaining 8-inch models.
With Herculean effort, however, it did succeed in its 5.25-inch programs. Figure
5.1 shows why this struggle occurred: In making the transition, Micropolis
assumed a position on a very different technological trajectory. It had to walk
away from every one of its major customers and replace the lost revenues with
sales of the new product line to an entirely different group of desktop computer
makers. Mabon remembers the experience as the most exhausting of his life.
Figure 5.1 Technology Transition and Market Position at Micropolis
Corporation
Source: Data are from various issues of Disk/Trend Report.
Micropolis finally introduced a 3.5-inch product in 1993. That was the point
at which the product had progressed to pack more than 1 gigabyte in the 3.5-inch
platform. At that level, Micropolis could sell the 3.5-inch drive to its existing
customers.
DISRUPTIVE TECHNOLOGIES AND THE THEORY OF
RESOURCE DEPENDENCE
The struggles recounted earlier of Seagate Technology’s attempts to sell 3.5-inch
drives and of Bucyrus Erie’s failed attempt to sell its early Hydrohoe only to its
mainstream customers illustrate how the theory of resource dependence can be
applied to cases of disruptive technologies. In both instances, Seagate and
Bucyrus were among the first in their industries to develop these disruptive
products. But despite senior managers’ decisions to introduce them, the impetus
or organizational energy required to launch the products aggressively into the
appropriate value networks simply did not coalesce—until customers needed
them.
Should we then accept the corollary stipulated by resource-dependence
theorists that managers are merely powerless individuals? Hardly. In the
Introduction, exploring the image of how people learned to fly, I noted that all
attempts had ended in failure as long as they consisted of fighting fundamental
laws of nature. But once laws such as gravity, Bernoulli’s principle, and the
notions of lift, drag and resistance began to be understood, and flying machines
were designed that accounted for or harnessed those laws, people flew quite
successfully. By analogy, this is what Quantum and Control Data did. By
embedding independent organizations within an entirely different value network,
where they were dependent upon the appropriate set of customers for survival,
those managers harnessed the powerful forces of resource dependence. The CEO
of Micro-polis fought them, but he won a rare and costly victory.
Disruptive technologies have had deadly impact in many industries besides
disk drives, mechanical excavators, and steel. 7 The following pages summarize
the effect of disruptive technologies in three other industries— computers,
retailing, and printers—to highlight how the only companies in those industries
that established strong market positions in the disruptive technologies were those
which, like Quantum and Control Data, harnessed rather than fought the forces
of resource dependence.
DEC, IBM, AND THE PERSONAL COMPUTER
Quite naturally, the computer industry and the disk drive industry have parallel
histories, because value networks of the latter are embedded in those of the
former. In fact, if the axes and intersecting trajectories depicted on the disk drive
trajectory map in Figure 1.7 were relabeled with computer-relevant terms, it
would summarize equally well the failure of leading computer industry firms.
IBM, the industry’s first leader, sold its mainframe computers to the central
accounting and data processing departments of large organizations. The
emergence of the minicomputer represented a disruptive technology to IBM and
its competitors. Their customers had no use for it; it promised lower, not higher,
margins; and the market initially was significantly smaller. As a result, the
makers of mainframes ignored the minicomputer for years, allowing a set of
entrants—Digital Equipment, Data General, Prime, Wang, and Nixdorf—to
create and dominate that market. IBM ultimately introduced its own line of
minicomputers, but it did so primarily as a defensive measure, when the
capabilities of minicomputers had advanced to the point that they were
performance-competitive with the computing needs of some of IBM’s
customers.
Similarly, none of the makers of minicomputers became a significant factor
in the desktop personal computer market, because to them the desktop computer
was a disruptive technology. The PC market was created by another set of
entrants, including Apple, Commodore, Tandy, and IBM. The minicomputer
makers were exceptionally prosperous and highly regarded by investors, the
business press, and students of good manage-ment—until the late 1980s, when
the technological trajectory of the desktop computer intersected with the
performance demanded by those who had previously bought minicomputers. The
missile-like attack of the desktop computer from below severely wounded every
minicomputer maker. Several of them failed. None established a viable position
in the desktop personal computer value network.
A similar sequence of events characterized the emergence of the portable
computer, where the market was created and dominated by a set of entrants like
Toshiba, Sharp, and Zenith. Apple and IBM, the leading desktop makers, did not
introduce portable models until the portables’ performance trajectory intersected
with the computing needs of their customers.
Probably none of these firms has been so deeply wounded by disruptive
Probably none of these firms has been so deeply wounded by disruptive
technology as Digital Equipment. DEC fell from fortune to folly in just a few
years, as stand-alone workstations and networked desktop computers obviated
most customers’ needs for minicomputers almost overnight.
DEC didn’t stumble for lack of trying, of course. Four times between 1983
and 1995 it introduced lines of personal computers targeted at consumers,
products that were technologically much simpler than DEC’s minicomputers.
But four times it failed to build businesses in this value network that were
perceived within the company as profitable. Four times it withdrew from the
personal computer market. Why? DEC launched all four forays from within the
mainstream company. 8 For all of the reasons so far recounted, even though
executive-level decisions lay behind the move into the PC business, those who
made the day-to-day resource allocation decisions in the company never saw the
sense in investing the necessary money, time, and energy in low-margin
products that their customers didn’t want. Higher-performance initiatives that
promised up-scale margins, such as DEC’s super-fast Alpha microprocessor and
its adventure into mainframe computers, captured the resources instead.
In trying to enter the desktop personal computing business from within its
mainstream organization, DEC was forced to straddle the two different cost
structures intrinsic to two different value networks. It simply couldn’t hack away
enough overhead cost to be competitive in low-end personal computers because
it needed those costs to remain competitive in its higher-performance products.
Yet IBM’s success in the first five years of the personal computing industry
stands in stark contrast to the failure of the other leading mainframe and
minicomputer makers to catch the disruptive desktop computing wave. How did
IBM do it? It created an autonomous organization in Florida, far away from its
New York state headquarters, that was free to procure components from any
source, to sell through its own channels, and to forge a cost structure appropriate
to the technological and competitive requirements of the personal computing
market. The organization was free to succeed along metrics of success that were
relevant to the personal computing market. In fact, some have argued that IBM’s
subsequent decision to link its personal computer division much more closely to
its mainstream organization was an important factor in IBM’s difficulties in
maintaining its profitability and market share in the personal computer industry.
It seems to be very difficult to manage the peaceful, unambiguous coexistence of
two cost structures, and two models for how to make money, within a single
company.
The conclusion that a single organization might simply be incapable of
The conclusion that a single organization might simply be incapable of
competently pursuing disruptive technology, while remaining competitive in
mainstream markets, bothers some “can-do” managers—and, in fact, most
managers try to do exactly what Micropolis and DEC did: maintain their
competitive intensity in the mainstream, while simultaneously trying to pursue
disruptive technology. The evidence is strong that such efforts rarely succeed;
position in one market will suffer unless two separate organizations, embedded
within the appropriate value networks, pursue their separate customers.
KRESGE, WOOLWORTH, AND DISCOUNT RETAILING
In few industries has the impact of disruptive technology been felt so pervasively
as in retailing, where discounters seized dominance from traditional department
and variety stores. The technology of discount retailing was disruptive to
traditional operations because the quality of service and selection offered by
discounters played havoc with the accustomed metrics of quality retailing.
Moreover, the cost structure required to compete profitably in discount retailing
was fundamentally different than that which department stores had developed to
compete within their value networks.
The first discount store was Korvette’s, which began operating a number of
outlets in New York in the mid-1950s. Korvette’s and its imitators operated at
the very low end of retailing’s product line, selling nationally known brands of
standard hard goods at 20 to 40 percent below department store prices. They
focused on products that “sold themselves” because customers already knew
how to use them. Relying on national brand image to establish the value and
quality of their products, these discounters eliminated the need for
knowledgeable salespeople; they also focused on the group of customers least
attractive to mainstream retailers: “young wives of blue collar workers with
young children.” 9 This was counter to the upscale formulas department stores
historically had used to define quality retailing and to improve profits.
Discounters didn’t accept lower profits than those of traditional retailers,
however; they just earned their profits through a different formula. In the
simplest terms, retailers cover their costs through the gross margin, or markup,
they charge over the cost of the merchandise they sell. Traditional department
stores historically marked merchandise up by 40 percent and turned their
inventory over four times in a year—that is, they earned 40 percent on the
amount they invested in inventory, four times during the year, for a total return
on inventory investment of 160 percent. Variety stores earned somewhat lower
profits through a formula similar to that used by the department stores. Discount
retailers earned a return on inventory investment similar to that of department
stores, but through a different model: low gross margins and high inventory
turns. Table 5.1 summarizes the three positions.
The history of discount retailing vividly recalls the history of minimill steel
making. Just like the minimills, discounters took advantage of their cost
structure to move upmarket and seize share from competing traditional retailers
structure to move upmarket and seize share from competing traditional retailers
at a stunning rate: first at the low end, in brand-name hard goods such as
hardware, small appliances, and luggage, and later in territory further to the
northeast such as home furnishings and clothing. Figure 5.2 illustrates how
stunning the discounters’ invasion was: Their share of retailing revenues in the
categories of goods they sold rose from 10 percent in 1960 to nearly 40 percent a
scant six years later.
Table 5.1 Different Pathways to Profits
* Calculated as Margins x Turns, in other words, the total of the margins earned through
successive turnovers each year. Source: Annual corporate reports of many companies in each
category for various years.
Figure 5.2 Gains in Discount Retailers’ Market Share, 1960–1966
Source: Data are from various issues of Discount Merchandiser.
Just as in disk drives and excavators, a few of the leading traditional retailers
—notably S. S. Kresge, F. W. Woolworth, and Dayton Hudson— saw the
disruptive approach coming and invested early. None of the other major retail
chains, including Sears, Montgomery Ward, J. C. Penney, and R. H. Macy, made
a significant attempt to create a business in discount retailing. Kresge (with its
Kmart chain) and Dayton Hudson (with the Target chain) succeeded. 10 They
both created focused discount retailing organizations that were independent from
their traditional business. They recognized and harnessed the forces of resource
dependence. By contrast, Woolworth failed in its venture (Woolco), trying to
launch it from within the F. W. Woolworth variety store company. A detailed
comparison of the approaches of Kresge and Woolworth, which started from
very similar positions, lends additional insight into why establishing independent
organizations to pursue disruptive technology seems to be a necessary condition
for success.
S. S. Kresge, then the world’s second largest variety store chain, began
studying discount retailing in 1957, while discounting was still in its infancy. By
1961, both Kresge and its rival F. W. Woolworth (the world’s largest variety
store operator) had announced initiatives to enter discount retailing. Both firms
opened stores in 1962, within three months of each other. The performance of
the Woolco and Kmart ventures they launched, however, subsequently differed
dramatically. A decade later, Kmart’s sales approached $3.5 billion while
Woolco’s sales were languishing unprofitably at $0.9 billion. 11
In making its commitment to discount retailing, Kresge decided to exit the
variety store business entirely: In 1959 it hired a new CEO, Harry Cunningham,
whose sole mission was to convert Kresge into a discounting powerhouse.
Cunningham, in turn, brought in an entirely new management team, so that by
1961 there “was not a single operating vice president, regional manager,
assistant regional manager, or regional merchandise manager who was not new
on the job.” 12 In 1961 Cunningham stopped opening any new variety stores,
embarking instead on a program of closing about 10 percent of Kresge’s existing
variety operations each year. This represented a wholesale refocusing of the
company on discount retailing.
Woolworth, on the other hand, attempted to support a program of sustaining
improvements in technology, capacity, and facilities in its core variety store
businesses while simultaneously investing in disruptive discounting. The
managers charged with improving the performance of Woolworth’s variety
stores were also charged with building “the largest chain of discount houses in
America.” CEO Robert Kirkwood asserted that Woolco “would not conflict with
the company’s plans for growth and expansion in the regular variety store
operations,” and that no existing stores would be converted to a discount format.
13 Indeed, as discount retailing hit its most frenzied expansion phase in the
1960s, Woolworth was opening new variety stores at the pace it had set in the
1950s.
Unfortunately (but predictably), Woolworth proved unable to sustain within a
single organization the two different cultures, and two different models of how
to make a profit, that were required to be successful in variety and discount
retailing. By 1967 it had dropped the term “discount” from all Woolco
advertising, adopting the term “promotional department store” instead. Although
initially Woolworth had set up a separate administrative staff for its Woolco
operation, by 1971 more rational, cost-conscious heads had prevailed.
In a move designed to increase sales per square foot in both Woolco and
Woolworth divisions, the two subsidiaries have been consolidated
operationally on a regional basis. Company officials say the consolidation
—which involves buying offices, distribution facilities and management
personnel at the regional level—will help both to develop better
merchandise and more efficient stores. Woolco will gain the benefits of
Woolworth’s buying resources, distribution facilities and additional
expertise in developing specialty departments. In return, Woolworth will
gain Woolco’s knowhow in locating, designing, promoting and operating
large stores over 100,000 sq. ft. 14
What was the impact of this cost-saving consolidation? It provided more
evidence that two models for how to make money cannot peacefully coexist
within a single organization. Within a year of this consolidation, Woolco had
increased its markups such that its gross margins were the highest in the discount
industry—about 33 percent. In the process, its inventory turns fell from the 7x it
originally had achieved to 4x. The formula for profit that had long sustained F.
W. Woolworth (35 percent margins for four inventory turns or 140 percent
return on inventory investment) was ultimately demanded of Woolco as well.
(See Figure 5.3.) Woolco was no longer a discounter—in name or in fact. Not
surprisingly, Woolworth’s venture into discount retailing failed: It closed its last
Woolco store in 1982.
Woolworth’s organizational strategy for succeeding in disruptive discount
retailing was the same as Digital Equipment’s strategy for launching its personal
computer business. Both founded new ventures within the mainstream
organization that had to earn money by mainstream rules, and neither could
achieve the cost structure and profit model required to succeed in the mainstream
value network.
Figure 5.3 Impact of the Integration of Woolco, and F. W. Woolworth on the
Way
Source: Data are from various annual reports of F. W. Woolworth Company and
from various issues of Discount Merchandiser.
SURVIVAL BY SUICIDE: HEWLETT-PACKARD’S LASER JET
AND INK-JET PRINTERS
Hewlett-Packard’s experience in the personal computer printer business
illustrates how a company’s pursuit of a disruptive technology by spinning out
an independent organization might entail, in the end, killing another of its
business units.
Hewlett-Packard’s storied success in manufacturing printers for personal
computers becomes even more remarkable when one considers its management
of the emergence of bubble-jet or ink-jet technology. Beginning in the mid1980s, HP began building a huge and successful business around laser jet
printing technology. The laser jet was a discontinuous improvement over dotmatrix printing, the previously dominant personal computer printing technology,
and HP built a commanding market lead.
When an alternative way of translating digital signals into images on paper
(ink-jet technology) first appeared, there were vigorous debates about whether
laser jet or ink jet would emerge as the dominant design in personal printing.
Experts lined up on both sides of the question, offering HP extensive advice on
which technology would ultimately become the printer of choice on the world’s
desktops. 15
Although it was never framed as such in the debates of the time, inkjet
printing was a disruptive technology. It was slower than the laser jet, its
resolution was worse, and its cost per printed page was higher. But the printer
itself was smaller and potentially much less expensive than the laser jet. At these
lower prices, it promised lower gross margin dollars per unit than the laser jet.
Thus, the ink-jet printer was a classic disruptive product, relative to the laser jet
business.
Rather than place its bet exclusively with one or the other, and rather than
attempt to commercialize the disruptive ink-jet from within the existing printer
division in Boise, Idaho, HP created a completely autonomous organizational
unit, located in Vancouver, Washington, with responsibility for making the inkjet printer a success. It then let the two businesses compete against each other.
Each has behaved classically. As shown in Figure 5.4, the laser jet division has
moved sharply upmarket, in a strategy reminiscent of 14-inch drives, mainframe
computers, and integrated steel mills. HP’s laser jet printers can print at high
speeds with exceptional resolution; handle hundreds of fonts and complicated
speeds with exceptional resolution; handle hundreds of fonts and complicated
graphics; print on two sides of the page; and serve multiple users on a network.
They have also gotten larger physically.
The ink-jet printer isn’t as good as the laser jet and may never be. But the
critical question is whether the ink jet could ever be as good a printer as the
personal desktop computing market demands. The answer appears to be yes. The
resolution and speed of ink-jet printers, while still inferior to those of laser jets,
are now clearly good enough for many students, professionals, and other unnetworked users of desktop computers.
HP’s ink-jet printer business is now capturing many of those who would
formerly have been laser jet users. Ultimately, the number of users at the
highest-performance end of the market, toward which the laser jet division is
headed, will probably become small. One of HP’s businesses may, in the end,
have killed another. But had HP not set up its ink-jet business as a separate
organization, the ink-jet technology would probably have languished within the
mainstream laser jet business, leaving one of the other companies now actively
competing in the ink-jet printer business, such as Canon, as a serious threat to
HP’s printer business. And by staying in the laser business, as well, HP has
joined IBM’s mainframe business and the integrated steel companies in making
a lot of money while executing an upmarket retreat. 16
Figure 5.4 Speed Improvement in InkJet and LaserJet Printers
Source: Hewlett-Packard product brochures, various years.
NOTES
1. The theory of resource dependence has been most thoroughly argued by
Jeffrey Pfeffer and Gerald R. Salancik in The External Control of
Organizations: A Resource Dependence Perspective (New York: Harper &
Row, 1978).
2. This implies that, in managing business under both normal conditions and
conditions of assault by a disruptive technology, the choice of which
customers the firm will serve has enormous strategic consequences.
3. Joseph L. Bower, in Managing the Resource Allocation Process (Homewood,
IL: Richard D. Irwin, 1972), presents an elegant and compelling picture of the
resource allocation process.
4. Chester Barnard, The Functions of the Executive (Cambridge, MA: Harvard
University Press, 1938), 190–191.
5. Quantum’s spin-out of the Hardcard effort and its subsequent strategic
reorientation is an example of the processes of strategy change described by
Robert Burgelman, in “Intraorganizational Ecology of Strategy-Making and
Organizational Adaptation: Theory and Field Research,” Organization
Science (2), 1991, 239–262, as essentially a process of natural selection
through which suboptimal strategic initiatives lose out to optimal ones in the
internal competition for corporate resources.
6. The failure of Micropolis to maintain simultaneous competitive commitments
to both its established technology and the new 5.25-inch technology is
consistent with the technological histories recounted by James Utterback, in
Mastering the Dynamics of Innovation (Boston: Harvard Business School
Press, 1994). Utterback found that firms that attempted to develop radically
new technology almost always tried to maintain simultaneous commitment to
the old and that they almost always failed.
7. A set of industries in which disruptive technologies are believed to have
played a role in toppling leading firms is presented by Richard S. Rosenbloom
and Clayton M. Christensen in “Technological Discontinuities, Organizational
Capabilities, and Strategic Commitments,” Industrial and Corporate Change
(3), 1994, 655–685.
8. In the 1990s, DEC finally set up a Personal Computer Division in its attempt
to build a significant personal computer business. It was not as autonomous
from DEC’s mainstream business; however, the Quantum and Control Data
spin-outs were. Although DEC set up specific performance metrics for the PC
division, it was still held, de facto, to corporate standards for gross margins
and revenue growth.
9. “Harvard Study on Discount Shoppers,” Discount Merchandiser, September,
1963, 71.
10. When this book was being written, Kmart was a crippled company, having
been beaten in a game of strategy and operational excellence by WalMart.
Nonetheless, during the preceding two decades, Kmart had been a highly
successful retailer, creating extraordinary value for Kresge shareholders.
Kmart’s present competitive struggles are unrelated to Kresge’s strategy in
meeting the original disruptive threat of discounting.
11. A detailed contrast between the Woolworth and Kresge approaches to
discount retailing can be found in the Harvard Business School teaching case.
“The Discount Retailing Revolution in America,” No. 695-081.
12. See Robert Drew-Bear, “S. S. Kresge’s Kmarts,” Mass Merchandising:
Revolution and Evolution (New York: Fairchild Publications, 1970), 218.
13. F. W. Woolworth Company Annual Report, 1981, p. 8.
14. “Woolco Gets Lion’s Share of New Space,” Chain Store Age, November,
1972, E27. This was an extraordinarily elegant, rational argument for the
consolidation, clearly crafted by a corporate spin-doctor extraordinaire. Never
mind that no Woolworth stores approached 100,000 square feet in size!
15. See, for example, “The Desktop Printer Industry in 1990,” Harvard Business
School, Case No. 9-390-173.
16. Business historian Richard Tedlow noted that the same dilemma had
confronted A&P’s executives as they deliberated whether to adopt the
disruptive supermarket retailing format:
The supermarket entrepreneurs competed against A&P not by doing better
what A&P was the best company in the world at doing, but by doing
something that A&P did not want to do at all. The greatest entrepreneurial
failure in this story is Kroger. This company was second in the market,
and one of its own employees (who left to found the world’s first
supermarket) knew how to make it first. Kroger executives did not listen.
Perhaps it was lack of imagination or perhaps, like the executives at A&P,
those at Kroger also had too much invested in the standard way of doing
business. If the executives at A&P endorsed the supermarket revolution,
they were ruining their own distribution system. That is why they sat by
they were ruining their own distribution system. That is why they sat by
paralyzed, unable to act until it was almost too late. In the end, A&P had
little choice. The company could ruin its own system, or see others do it.
See Richard Tedlow, New and Improved: The Story of Mass Marketing in
America (Boston: Harvard Business School Press, 1996).
CHAPTER SIX
Match the Size of the Organization to the Size of
the Market
Managers who confront disruptive technological change must be leaders,
not followers, in commercializing disruptive technologies.
Doing so requires implanting the projects that are to
develop such technologies in commercial organizations
that match in size the market they are to address. These
assertions are based on two key findings of this study:
that leadership is more crucial in coping with disruptive
technologies than with sustaining ones, and that small,
emerging markets cannot solve the near-term growth and
profit requirements of large companies.
The evidence from the disk drive industry shows that creating new markets is
significantly less risky and more rewarding than entering established markets
against entrenched competition. But as companies become larger and more
successful, it becomes even more difficult to enter emerging markets early
enough. Because growing companies need to add increasingly large chunks of
new revenue each year just to maintain their desired rate of growth, it becomes
less and less possible that small markets can be viable as vehicles through which
to find these chunks of revenue. As we shall see, the most straightforward way
of confronting this difficulty is to implant projects aimed at commercializing
disruptive technologies in organizations small enough to get excited about smallmarket opportunities, and to do so on a regular basis even while the mainstream
company is growing.
ARE THE PIONEERS REALLY THE ONES WITH ARROWS IN
THEIR BACKS?
A crucial strategic decision in the management of innovation is whether it is
important to be a leader or acceptable to be a follower. Volumes have been
written on first-mover advantages, and an offsetting amount on the wisdom of
waiting until the innovation’s major risks have been resolved by the pioneering
firms. “You can always tell who the pioneers were,” an old management adage
goes. “They’re the ones with the arrows in their backs.” As with most
disagreements in management theory, neither position is always right. Indeed,
some findings from the study of the disk drive industry give some insight into
when leadership is critical and when followership makes better sense.
Leadership in Sustaining Technologies May Not Be Essential
One of the watershed technologies affecting the pace at which disk drive makers
have increased the recording density of their drives was the thin-film read/write
head. We saw in chapter 1 that despite the radically different, competencedestroying character of the technology, the $100 million and five-to-fifteen year
expense of developing it, the firms that led in this technology were the leading,
established disk drive manufacturers.
Because of the risk involved in the technology’s development and its
potential importance to the industry, the trade press began speculating in the late
1970s about which competitor would lead with thin-film heads. How far might
conventional ferrite head technology be pushed? Would any drive makers get
squeezed out of the industry race because they placed a late or wrong bet on the
new head technology? Yet, it turned out, whether a firm led or followed in this
innovation did not make a substantial difference in its competitive position. This
is illustrated in Figures 6.1 and 6.2.
Figure 6.1 shows when each of the leading firms introduced its first model
employing thin-film head technology. The vertical axis measures the recording
density of the drive. The bottom end of the line for each firm denotes the
maximum recording density it had achieved before it introduced a model with a
thin-film head. The top end of each line indicates the density of the first model
each company introduced with a thin-film head. Notice the wide disparity in the
points at which the firms felt it was important to introduce the new technology.
IBM led the industry, introducing its new head when it had achieved 3 megabits
(Mb) per square inch. Memorex and Storage Technology similarly took a
leadership posture with respect to this technology. At the other end, Fujitsu and
Hitachi pushed the performance of conventional ferrite heads nearly ten times
beyond the point where IBM first introduced the technology, choosing to be
followers, rather than leaders, in thin-film technology.
Figure 6.1 Points at Which Thin-Film Technology Was Adopted by Leading
Manufacturers, Relative to the Capabilities of Ferrite/Oxide Technology at the
Time of the Switch
Source: Data are from various issues of Disk/Trend Report.
What benefit, if any, did leadership in this technology give to the pioneers?
There is no evidence that the leaders gained any significant competitive
advantage over the followers; none of the firms that pioneered thin-film
technology gained significant market share on that account. In addition,
pioneering firms appear not to have developed any sort of learning advantage
enabling them to leverage their early lead to attain higher levels of density than
did followers. Evidence of this is displayed in Figure 6.2. The horizontal axis
shows the order in which the firms adopted thin-film heads. Hence, IBM was the
first, Memorex, the second, and Fujitsu the fifteenth. The vertical axis gives the
rank ordering of the recording density of the most advanced model marketed by
each firm in 1989. If the early adopters of thin-film heads enjoyed some sort of
experience-based advantage over the late adopters, then we would expect the
points in the chart to slope generally from the upper left toward the lower right.
The chart shows instead that there is no relationship between leadership and
followership in thin-film heads and any subsequent technological edge. 1
Each of the other sustaining technologies in the industry’s history present a
similar picture. There is no evidence that any of the leaders in developing and
adopting sustaining technologies developed a discernible competitive advantage
over the followers. 2
Leadership in Disruptive Technologies Creates Enormous Value
In contrast to the evidence that leadership in sustaining technologies has
historically conferred little advantage on the pioneering disk drive firms, there is
strong evidence that leadership in disruptive technology has been very important.
The companies that entered the new value networks enabled by disruptive
generations of disk drives within the first two years after those drives appeared
were six times more likely to succeed than those that entered later.
Eighty-three companies entered the U.S. disk drive industry between 1976
and 1993. Thirty-five of these were diversified concerns, such as Memorex,
Ampex, 3M, and Xerox, that made other computer peripheral equipment or other
magnetic recording products. Forty-eight were independent startup companies,
many being financed by venture capital and headed by people who previously
had worked for other firms in the industry. These numbers represent the
complete census of all firms that ever were incorporated and/or were known to
have announced the design of a hard drive, whether or not they actually sold any.
It is not a statistical sample of firms that might be biased in favor or against any
type of firm.
Figure 6.2 Relationship between Order of Adoption of Thin-Film Technology
and Areal Density of Highest-Performance 1989 Model
Source: Clayton M. Christensen, “Exploring the Limits of the Technology SCurve. Part I: Component Technologies,” Production and Operations
Management 1, no. 4 (Fall 1992): 347. Reprinted by permission.
The entry strategies employed by each of these firms can be characterized
along the two axes in Table 6.1. The vertical axis describes technology
strategies, with firms at the bottom using only proven technologies in their initial
products and those at the top using one or more new component technologies. 3
The horizontal axis charts market strategies, with firms at the left having entered
already established value networks and those at the right having entered
emerging value networks. 4 Another way to characterize this matrix is to note
that companies that were agressive at entry in developing and adopting
sustaining innovations appear in the two top boxes, left and right, while
companies that led at entry in creating new value networks appear in the two
right-hand boxes, top and bottom. The companies in the right boxes include all
companies that attempted to create new value networks, even those networks
that did not materialize into substantial markets (such as removable hard drives).
Table 6.1 Disk Drive Companies Achieving $100 Million in Annual Revenues in
at Least One Year Between 1976 and 1994
Source: Data are from various issues of Disk/Trend Report.
Note: S indicates success, F indicates failure, N indicates no, T indicates total.
Each quadrant displays the number of companies that entered using the
strategy represented. Under the S (for “success”) are the number of firms that
successfully generated $100 million in revenues in at least one year, even if the
firm subsequently failed; F (for “failure”) shows the number of firms that failed
ever to reach the $100 million revenue threshold and that have subsequently
exited the industry; N (for “no”) indicates the number of firms for which there is
as yet no verdict because, while still operating in 1994, they had not yet reached
$100 million in sales; and T (for “total”) lists the total number of firms that
entered in each category. 5 The column labeled “% Success” indicates the
percentage of the total number of firms that reached $100 million in sales.
Finally, beneath the matrix are the sums of the data in the two quadrants above.
The numbers beneath the matrix show that only three of the fifty-one firms (6
percent) that entered established markets ever reached the $100 million revenue
benchmark. In contrast, 37 percent of the firms that led in disruptive
technological innovation—those entering markets that were less than two years
old—surpassed the $100 million level, as shown on the right side of Table 6.1.
Whether a firm was a startup or a diversified firm had little impact on its success
rate. What mattered appears not to have been its organizational form, but
whether it was a leader in introducing disruptive products and creating the
markets in which they were sold. 6
Only 13 percent of the firms that entered attempting to lead in sustaining
component technologies (the top half of the matrix) succeeded, while 20 percent
of the firms that followed were successful. Clearly, the lower-right quadrant
offered the most fertile ground for success.
The cumulative sales numbers in the right-most columns in each quadrant
show the total, cumulative revenues logged by all firms pursuing each of the
strategies; these are summarized below the matrix. The result is quite stunning.
The firms that led in launching disruptive products together logged a cumulative
total of $62 billion dollars in revenues between 1976 and 1994. 7 Those that
followed into the markets later, after those markets had become established,
logged only $3.3 billion in total revenue. It is, indeed, an innovator’s dilemma.
Firms that sought growth by entering small, emerging markets logged twenty
times the revenues of the firms pursuing growth in larger markets. The
difference in revenues per firm is even more striking: The firms that followed
late into the markets enabled by disruptive technology, on the left half of the
matrix, generated an average cumulative total of $64.5 million per firm. The
average company that led in disruptive technology generated $1.9 billion in
revenues. The firms on the left side seem to have made a sour bargain. They
exchanged a market risk, the risk that an emerging market for the disruptive
technology might not develop after all, for a competitive risk, the risk of entering
markets against entrenched competition. 8
COMPANY SIZE AND LEADERSHIP IN DISRUPTIVE
TECHNOLOGIES
Despite evidence that leadership in disruptive innovation pays such huge
dividends, established firms, as shown in the first four chapters of this book,
often fail to take the lead. Customers of established firms can hold the
organizations captive, working through rational, well-functioning resource
allocation processes to keep them from commercializing disruptive technologies.
One cruel additional disabling factor that afflicts established firms as they work
to maintain their growth rate is that the larger and more successful they become,
the more difficult it is to muster the rationale for entering an emerging market in
its early stages, when the evidence above shows that entry is so crucial.
Good managers are driven to keep their organizations growing for many
reasons. One is that growth rates have a strong effect on share prices. To the
extent that a company’s stock price represents the discounted present value of
some consensus forecast of its future earnings stream, then the level of the stock
price—whether it goes up or down—is driven by changes in the projected rate of
growth in earnings. 9 In other words, if a company’s current share price is
predicated on a consensus growth forecast of 20 percent, and the market’s
consensus for growth is subsequently revised downward to 15 percent growth,
then the company’s share price will likely fall—even though its revenues and
earnings will still be growing at a healthy rate. A strong and increasing stock
price, of course, gives a company access to capital on favorable terms; happy
investors are a great asset to a company.
Rising share prices make stock option plans an inexpensive way to provide
incentive to and to reward valuable employees. When share prices stagnate or
fall, options lose their value. In addition, company growth creates room at the
top for high-performing employees to expand the scope of their responsibilities.
When companies stop growing, they begin losing many of their most promising
future leaders, who see less opportunity for advancement.
Finally, there is substantial evidence that growing companies find it much
easier to justify investments in new product and process technologies than do
companies whose growth has stopped. 10
Unfortunately, companies that become large and successful find that
maintaining growth becomes progressively more difficult. The math is simple: A
$40 million company that needs to grow profitably at 20 percent to sustain its
$40 million company that needs to grow profitably at 20 percent to sustain its
stock price and organizational vitality needs an additional $8 million in revenues
the first year, $9.6 million the following year, and so on; a $400 million
company with a 20 percent targeted growth rate needs new business worth $80
million in the first year, $96 million in the next, and so on; and a $4 billion
company with a 20 percent goal needs to find $800 million, $960 million, and so
on, in each successive year.
This problem is particularly vexing for big companies confronting disruptive
technologies. Disruptive technologies facilitate the emergence of new markets,
and there are no $800 million emerging markets. But it is precisely when
emerging markets are small—when they are least attractive to large companies
in search of big chunks of new revenue—that entry into them is so critical.
How can a manager of a large, successful company deal with these realities
of size and growth when confronted by disruptive change? I have observed three
approaches in my study of this problem:
1. Try to affect the growth rate of the emerging market, so that it becomes big
enough, fast enough, to make a meaningful dent on the trajectory of profit
and revenue growth of a large company.
2. Wait until the market has emerged and become better defined, and then
enter after it “has become large enough to be interesting.”
3. Place responsibility to commercialize disruptive technologies in
organizations small enough that their performance will be meaningfully
affected by the revenues, profits, and small orders flowing from the
disruptive business in its earliest years.
As the following case studies show, the first two approaches are fraught with
problems. The third has its share of drawbacks too, but offers more evidence of
promise.
CASE STUDY: PUSHING THE GROWTH RATE OF AN
EMERGING MARKET
The history of Apple Computer’s early entry into the handheld computer, or
personal digital assistant (PDA), market helps to clarify the difficulties
confronting large companies in small markets.
Apple Computer introduced its Apple I in 1976. It was at best a preliminary
product with limited functionality, and the company sold a total of 200 units at
$666 each before withdrawing it from the market. But the Apple I wasn’t a
financial disaster. Apple had spent modestly on its development, and both Apple
and its customers learned a lot about how desktop personal computers might be
used. Apple incorporated this learning into its Apple II computer, introduced in
1977, which was highly successful. Apple sold 43,000 Apple II computers in the
first two years they were on the market, 11 and the product’s success positioned
the company as the leader in the personal computer industry. On the basis of the
Apple II’s success Apple went public in 1980.
A decade after the release of the Apple II, Apple Computer had grown into a
$5 billion company, and like all large and successful companies, it found itself
having to add large chunks of revenue each year to preserve its equity value and
organizational vitality. In the early 1990s, the emerging market for handheld
PDAs presented itself as a potential vehicle for achieving that needed growth. In
many ways, this opportunity, analogous to that in 1978 when the Apple II
computer helped shape its industry, was a great fit for Apple. Apple’s distinctive
design expertise was in user-friendly products, and user-friendliness and
convenience were the basis of the PDA concept.
How did Apple approach this opportunity? Aggressively. It invested scores
of millions of dollars to develop its product, dubbed the “Newton.” The
Newton’s features were defined through one of the most thoroughly executed
market research efforts in corporate history; focus groups and surveys of every
type were used to determine what features consumers would want. The PDA had
many of the characteristics of a disruptive computing technology, and
recognizing the potential problems, Apple CEO John Sculley made the
Newton’s development a personal priority, promoting the product widely, and
ensuring that the effort got the technical and financial resources it needed.
Apple sold 140,000 Newtons in 1993 and 1994, its first two years on the
market. Most observers, of course, viewed the Newton as a big flop.
market. Most observers, of course, viewed the Newton as a big flop.
Technically, its handwriting recognition capabilities were disappointing, and its
wireless communications technologies had made it expensive. But what was
most damning was that while Sculley had publicly positioned the Newton as a
key product to sustain the company’s growth, its first-year sales amounted to
about 1 percent of Apple’s revenues. Despite all the effort, the Newton made
hardly a dent in Apple’s need for new growth.
But was the Newton a failure? The timing of Newton’s entry into the
handheld market was akin to the timing of the Apple II into the desktop market.
It was a market-creating, disruptive product targeted at an undefinable set of
users whose needs were unknown to either themselves or Apple. On that basis,
Newton’s sales should have been a pleasant surprise to Apple’s executives: It
outsold the Apple II in its first two years by a factor of more than three to one.
But while selling 43,000 units was viewed as an IPO-qualifying triumph in the
smaller Apple of 1979, selling 140,000 Newtons was viewed as a failure in the
giant Apple of 1994.
As chapter 7 will show, disruptive technologies often enable something to be
done that previously had been deemed impossible. Because of this, when they
initially emerge, neither manufacturers nor customers know how or why the
products will be used, and hence do not know what specific features of the
product will and will not ultimately be valued. Building such markets entails a
process of mutual discovery by customers and manufacturers—and this simply
takes time. In Apple’s development of the desktop computer, for example, the
Apple I failed, the first Apple II was lackluster, and the Apple II[H11501]
succeeded. The Apple III was a market failure because of quality problems, and
the Lisa was a failure. The first two generations of the Macintosh computer also
stumbled. It wasn’t until the third iteration of the Macintosh that Apple and its
customers finally found “it”: the standard for convenient, user-friendly
computing to which the rest of the industry ultimately had to conform. 12
In launching the Newton, however, Apple was desperate to short-circuit this
coalescent process for defining the ultimate product and market. It assumed that
its customers knew what they wanted and spent very aggressively to find out
what this was. (As the next chapter will show, this is impossible.) Then to give
customers what they thought they wanted, Apple had to assume the precarious
role of a sustaining technology leader in an emerging industry. It spent enormous
sums to push mobile data communications and handwriting recognition
technologies beyond the state of the art. And finally, it spent aggressively to
convince people to buy what it had designed.
Because emerging markets are small by definition, the organizations
competing in them must be able to become profitable at small scale. This is
crucial because organizations or projects that are perceived as being profitable
and successful can continue to attract financial and human resources both from
their corporate parents and from capital markets. Initiatives perceived as failures
have a difficult time attracting either. Unfortunately, the scale of the investments
Apple made in its Newton in order to hasten the emergence of the PDA market
made it very difficult to earn an attractive return. Hence, the Newton came to be
broadly viewed as a flop.
As with most business disappointments, hindsight reveals the faults in
Apple’s Newton project. But I believe that the root cause of Apple’s struggle
was not inappropriate management. The executives’ actions were a symptom of
a deeper problem: Small markets cannot satisfy the near-term growth
requirements of big organizations.
CASE STUDY: WAITING UNTIL A MARKET IS LARGE
ENOUGH TO BE INTERESTING
A second way that many large companies have responded to the disruptive
technology trap is to wait for emerging markets to “get large enough to be
interesting” before they enter. Sometimes this works, as IBM’s well-timed 1981
entry into the desktop PC business demonstrated. But it is a seductive logic that
can backfire, because the firms creating new markets often forge capabilities that
are closely attuned to the requirements of those markets and that later entrants
find difficult to replicate. Two examples from the disk drive industry illustrate
this problem.
Priam Corporation, which ascended to leadership of the market for 8-inch
drives sold to minicomputer makers after its entry in 1978, had built the
capability in that market to develop its drives on a two-year rhythm. This pace of
new product introduction was consistent with the rhythm by which its customers,
minicomputer makers, introduced their new products into the market.
Seagate’s first 5.25-inch drive, introduced to the emerging desktop market in
1980, was disruptively slow compared to the performance of Priam’s drives in
the minicomputer market. But by 1983, Seagate and the other firms that led in
implementing the disruptive 5.25-inch technology had developed a one-year
product introduction rhythm in their market. Because Seagate and Priam
achieved similar percentage improvements in speed with each new product
generation, Seagate, by introducing new generations on a one-year rhythm,
quickly began to converge on Priam’s performance advantage.
Priam introduced its first 5.25-inch drive in 1982. But the rhythm by which it
introduced its subsequent 5.25-inch models was the two-year capability it had
honed in the minicomputer market—not the one-year cycle required to compete
in the desktop marketplace. As a consequence, it was never able to secure a
single major OEM order from a desktop computer manufacturer: It just couldn’t
hit their design windows with its new products. And Seagate, by taking many
more steps forward than did Priam, was able to close the performance gap
between them. Priam closed its doors in 1990.
The second example occurred in the next disruptive generation. Seagate
Technology was the second in the industry to develop a 3.5-inch drive in 1984.
Analysts at one point had speculated that Seagate might ship 3.5-inch drives as
early as 1985; and indeed, Seagate showed a 10 MB model at the fall 1985
Comdex Show. When Seagate still had not shipped a 3.5-inch drive by late 1986,
CEO Al Shugart explained, “So far, there just isn’t a big enough market for it, as
yet.” 13 In 1987, when the 3.5-inch market at $1.6 billion had gotten “big enough
to be interesting,” Seagate finally launched its offering. By 1991, however, even
though Seagate had by then built substantial volume in 3.5-inch drives, it had not
yet succeeded in selling a single drive to a maker of portable computers: Its
models were all sold into the desktop market, defensively cannibalizing its sales
of 5.25-inch drives. Why?
One likely reason for this phenomenon is that Conner Peripherals, which
pioneered and maintained the lead in selling 3.5-inch drives to portable computer
makers, fundamentally changed the way drive makers had to approach the
portables market. As one Conner executive described it,
From the beginning of the OEM disk drive industry, product development
had proceeded in three sequential steps. First you designed the drive; then
you made it; and then you sold it. We changed all that. We first sell the
drives; then we design them; and then we build them. 14
In other words, Conner set a pattern whereby drives for the portable computer
market were custom-designed for major customers. And it refined a set of
capabilities in its marketing, engineering, and manufacturing processes that were
tailored to that pattern. 15 Said another Conner executive, “Seagate was never
able to figure out how to sell drives in the portable market. They just never got
it.” 16
CASE STUDY: GIVING SMALL OPPORTUNITIES TO SMALL
ORGANIZATIONS
Every innovation is difficult. That difficulty is compounded immeasurably,
however, when a project is embedded in an organization in which most people
are continually questioning why the project is being done at all. Projects make
sense to people if they address the needs of important customers, if they
positively impact the organization’s needs for profit and growth, and if
participating in the project enhances the career opportunities of talented
employees. When a project doesn’t have these characteristics, its manager
spends much time and energy justifying why it merits resources and cannot
manage the project as effectively. Frequently in such circumstances, the best
people do not want to be associated with the project—and when things get tight,
projects viewed as nonessential are the first to be canceled or postponed.
Executives can give an enormous boost to a project’s probability of success,
therefore, when they ensure that it is being executed in an environment in which
everyone involved views the endeavor as crucial to the organization’s future
growth and profitability. Under these conditions, when the inevitable
disappointments, unforeseen problems, and schedule slippages occur, the
organization will be more likely to find ways to muster whatever is required to
solve the problem.
As we have seen, a project to commercialize a disruptive technology in a
small, emerging market is very unlikely to be considered essential to success in a
large company; small markets don’t solve the growth problems of big
companies. Rather than continually working to convince and remind everyone
that the small, disruptive technology might someday be significant or that it is at
least strategically important, large companies should seek to embed the project
in an organization that is small enough to be motivated by the opportunity
offered by a disruptive technology in its early years. This can be done either by
spinning out an independent organization or by acquiring an appropriately small
company. Expecting achievement-driven employees in a large organization to
devote a critical mass of resources, attention, and energy to a disruptive project
targeted at a small and poorly defined market is equivalent to flapping one’s
arms in an effort to fly: It denies an important tendency in the way organizations
work. 17
There are many success stories to the credit of this approach. Control Data,
There are many success stories to the credit of this approach. Control Data,
for example, which had essentially missed the 8-inch disk drive generation, sent
a group to Oklahoma City to commercialize its 5.25-inch drive. In addition to
CDC’s need to escape the power of its mainstream customers, the firm explicitly
wanted to create an organization whose size matched the opportunity. “We
needed an organization,” reflected one manager, “that could get excited about a
$50,000 order. In Minneapolis [which derived nearly $1 billion from the sale of
14-inch drives in the mainframe market] you needed a million-dollar order just
to turn anyone’s head.” CDC’s Oklahoma City venture proved to be a significant
success.
Another way of matching the size of an organization to the size of the
opportunity is to acquire a small company within which to incubate the
disruptive technology. This is how Allen Bradley negotiated its very successful
disruptive transition from mechanical to electronic motor controls.
For decades the Allen Bradley Company (AB) in Milwaukee has been the
undisputed leader in the motor controls industry, making heavy-duty,
sophisticated switches that turn large electric motors off and on and protect them
from overloads and surges in current. AB’s customers were makers of machine
tools and cranes as well as contractors who installed fans and pumps for
industrial and commercial heating, ventilating, and air conditioning (HVAC)
systems. Motor controls were electromechanical devices that operated on the
same principle as residential light switches, although on a larger scale. In
sophisticated machine tools and HVAC systems, electric motors and their
controls were often linked, through systems of electromechanical relay switches,
to turn on and off in particular sequences and under particular conditions.
Because of the value of the equipment they controlled and the high cost of
equipment downtime, controls were required to be rugged, capable of turning on
and off millions of times and of withstanding the vibrations and dirt that
characterized the environments in which they were used.
In 1968, a startup company, Modicon, began selling electronic programmable
motor controls—a disruptive technology from the point of view of mainstream
users of electromechanical controls. Texas Instruments (TI) entered the fray
shortly thereafter with its own electronic controller. Because early electronic
controllers lacked the real and perceived ruggedness and robustness for harsh
environments of the hefty AB-type controllers, Modicon and TI were unable to
sell their products to mainstream machine tool makers and HVAC contractors.
As performance was measured in the mainstream markets, electronic products
underperformed conventional controllers, and few mainstream customers needed
underperformed conventional controllers, and few mainstream customers needed
the programmable flexibility offered by electronic controllers.
As a consequence, Modicon and TI were forced to cultivate an emerging
market for programmable controllers: the market for factory automation.
Customers in this emerging market were not equipment manufacturers, but
equipment users, such as Ford and General Motors, who were just beginning
their attempt to integrate pieces of automatic manufacturing equipment.
Of the five leading manufacturers of electromechanical motor controls—
Allen Bradley, Square D, Cutler Hammer, General Electric, and Westinghouse
—only Allen Bradley retained a strong market position as programmable
electronic controls improved in ruggedness and began to invade the core motor
control markets. Allen Bradley entered the electronic controller market just two
years after Modicon and built a market-leading position in the new technology
within a few years, even as it kept its strength in its old electromechanical
products. It subsequently transformed itself into a major supplier of electronic
controllers for factory automation. The other four companies, by contrast,
introduced electronic controllers much later and subsequently either exited the
controller business or were reduced to weak positions. From a capabilities
perspective this is a surprising outcome, because General Electric and
Westinghouse had much deeper expertise in microelectronics technologies at
that time than did Allen Bradley, which had no institutional experience in the
technology.
What did Allen Bradley do differently? In 1969, just one year after Modicon
entered the market, AB executives bought a 25 percent interest in Information
Instruments, Inc., a fledgling programmable controller startup based in Ann
Arbor, Michigan. The following year it purchased outright a nascent division of
Bunker Ramo, which was focused on programmable electronic controls and their
emerging markets. AB combined these acquisitions into a single unit and
maintained it as a business separate from its mainstream electromechanical
products operation in Milwaukee. Over time, the electronics products have
significantly eaten into the electromechanical controller business, as one AB
division attacked the other. 18 By contrast, each of the other four companies tried
to manage its electronic controller businesses from within its mainstream
electromechanical divisions, whose customers did not initially need or want
electronic controls. Each failed to develop a viable position in the new
technology.
Johnson & Johnson has with great success followed a strategy similar to
Allen Bradley’s in dealing with disruptive technologies such as endoscopic
surgical equipment and disposable contact lenses. Though its total revenues
surgical equipment and disposable contact lenses. Though its total revenues
amount to more than $20 billion, J&J comprises 160 autonomously operating
companies, which range from its huge MacNeil and Janssen pharmaceuticals
companies to small companies with annual revenues of less than $20 million.
Johnson & Johnson’s strategy is to launch products of disruptive technologies
through very small companies acquired for that purpose.
SUMMARY
It is not crucial for managers pursuing growth and competitive advantage to be
leaders in every element of their business. In sustaining technologies, in fact,
evidence strongly suggests that companies which focus on extending the
performance of conventional technologies, and choose to be followers in
adopting new ones, can remain strong and competitive. This is not the case with
disruptive technologies, however. There are enormous returns and significant
first-mover advantages associated with early entry into the emerging markets in
which disruptive technologies are initially used. Disk drive manufacturers that
led in commercializing disruptive technology grew at vastly greater rates than
did companies that were disruptive technology followers.
Despite the evidence that leadership in commercializing disruptive
technologies is crucial, large, successful innovators encounter a significant
dilemma in the pursuit of such leadership. In addition to dealing with the power
of present customers as discussed in the last chapter, large, growth-oriented
companies face the problem that small markets don’t solve the near-term growth
needs of large companies. The markets whose emergence is enabled by
disruptive technologies all began as small ones. The first orders that the
pioneering companies received in those markets were small ones. And the
companies that cultivated those markets had to develop cost structures enabling
them to become profitable at small scale. Each of these factors argues for a
policy of implanting projects to commercialize disruptive innovations in small
organizations that will view the projects as being on their critical path to growth
and success, rather than as being distractions from the main business of the
company.
This recommendation is not new, of course; a host of other management
scholars have also argued that smallness and independence confer certain
advantages in innovation. It is my hope that chapters 5 and 6 provide deeper
insight about why and under what circumstances this strategy is appropriate.
NOTES
1. The benefits of persistently pursuing incremental improvements versus taking
big strategic leaps have been capably argued by Robert Hayes in “Strategic
Planning: Forward in Reverse?” Harvard Business Review, November–
December, 1985, 190–197.
I believe that there are some specific situations in which leadership in
sustaining technology is crucial, however. In a private conversation, Professor
Kim Clark characterized these situations as those affecting knife-edge
businesses, that is, businesses in which the basis of competition is simple and
unidimensional and there is little room for error. An example of such a knifeedge industry is the photolithographic aligner (PLA) industry, studied by
Rebecca M. Henderson and Kim B. Clark, in “Architectural Innovation: The
Reconfiguration of Existing Systems and the Failure of Established Firms,”
Administrative Science Quarterly (35), March, 1990, 9–30. In this case,
aligner manufacturers failed when they fell behind technologically in the face
of sustaining architectural changes. This is because the basis of competition in
the PLA industry was quite straightforward even though the products
themselves were very complex: products either made the narrowest line width
on silicon wafers of any in the industry or no one bought them. This is
because PLA customers, makers of integrated circuits, simply had to have the
fastest and most capable photolithographic alignment equipment or they could
not remain competitive in their own markets. The knife-edge existed because
product functionality was the only basis of competition: PLA manufacturers
would either fall off one side to rapid success or off the other side to failure.
Clearly, such knife-edge situations make leadership in sustaining technology
very important.
In most other sustaining situations, however, leadership is not crucial. This
far more common situation is the subject of Richard S. Rosenbloom’s study of
the transition by National Cash Register from electro-mechanical to electronic
technology. (See Richard S. Rosenbloom, “From Gears to Chips: The
Transformation of NCR and Harris in the Digital Era,” Working paper,
Harvard Business School Business History Seminar, 1988). In this case, NCR
was very late in its industry in developing and launching a line of electronic
cash registers. So late was NCR with this technology, in fact, that its sales of
new cash registers dropped essentially to zero for an entire year in the early
1980s. Nonetheless, the company had such a strong field service capability
that it survived by serving its installed base for the year it took to develop and
launch its electronic cash registers. NCR then leveraged the strength of its
brand name and field sales presence to quickly recapture its share of the
market.
Even though a cash register is a simpler machine than a photolithographic
aligner, I would characterize its market as complex, in that there are multiple
bases of competition, and hence multiple ways to survive. As a general rule,
the more complex a market, the less important is leadership in sustaining
technological innovations. It is in dealing with knife-edge markets or with
disruptive technologies that leadership appears to be crucial. I am indebted to
Professors Kim B. Clark and Robert Hayes for their contributions to my
thinking on this topic.
2. This is not to say that firms whose product performance or product cost
consistently lagged behind the competition were able to prosper. I assert that
there is no evidence that leadership in sustaining technological innovation
confers a discernible and enduring competitive advantage over companies that
have adopted a follower strategy because there are numerous ways to “skin
the cat” in improving the performance of a complex product such as a disk
drive. Developing and adopting new component technologies, such as thinfilm and magneto-resistive heads, is one way to improve performance, but
there are innumerable other avenues for extending the performance of
conventional technologies while waiting for new approaches to become better
understood and more reliable. This argument is presented more fully in
Clayton M. Christensen, “Exploring the Limits of the Technology S-Curve,”
Production and Operations Management (1), 1992, 334–366.
3. For the purposes of this analysis, a technology was classed as “new or
unproven” if less than two years had elapsed from the time it had first
appeared in a product that was manufactured and sold by a company
somewhere in the world or if, even though it had been in the market for more
than two years, less than 20 percent of the disk drive makers had used the
technology in one of their products.
4. In this analysis, emerging markets or value networks were those in which two
years or less had elapsed since the first rigid disk drive had been used with
that class of computers; established markets or value networks were those in
which more than two years had elapsed since the first drive was used.
5. Entry by acquisition was a rare route of entry in the disk drive industry. Xerox
followed this strategy, acquiring Diablo, Century Data, and Shugart
Associates. The performance of these companies after acquisition was so poor
that few other companies followed Xerox’s lead. The only other example of
entry by acquisition was the acquisition of Tandon by Western Digital, a
manufacturer of controllers. In the case of Xerox and Western Digital, the
entry strategy of the firms they acquired is recorded in Table 6.1. Similarly,
the start-up of Plus Development Corporation, a spin-out of Quantum, appears
in Table 6.1 as a separate company.
6. The evidence summarized in this matrix may be of some use to venture capital
investors, as a general way to frame the riskiness of proposed investments. It
suggests that start-ups which propose to commercialize a breakthrough
technology that is essentially sustaining in character have a far lower
likelihood of success than start-ups whose vision is to use proven technology
to disrupt an established industry with something that is simpler, more
reliable, and more convenient. The established firms in an industry have every
incentive to catch up with a supposed sustaining technological breakthrough,
while they have strong disincentives to pursue disruptive initiatives.
7. Not all of the small, emerging markets actually became large ones. The
market for removable drive modules, for example, remained a small niche for
more than a decade, only beginning to grow to significant size in the mid1990s. The conclusion in the text that emerging markets offer a higher
probability for success reflects the average, not an invariant result.
8. The notions that one ought not accept the risks of innovating simultaneously
along both market and technology dimensions are often discussed among
venture capitalists. It is also a focus of chapter 5 in Lowell W. Steele,
Managing Technology (New York: McGraw Hill, 1989). The study reported
here of the posterior probabilities of success for different innovation strategies
builds upon the concepts of Steele and Lyle Ochs (whom Steele cites). I was
also stimulated by ideas presented in Allan N. Afuah and Nik Bahram, “The
Hypercube of Innovation,” Research Policy (21), 1992.
9. The simplest equation used by financial analysts to determine share price is P
[H11505] D/(C-G), where P [H11505] price per share, D [H11505] dividends
per share, C [H11505] the company’s cost of capital, and G [H11505]
projected long-term growth rate.
10. This evidence is summarized by Clayton M. Christensen in “Is Growth an
Enabler of Good Management, or the Result of It?” Harvard Business School
working paper, 1996.
11. Scott Lewis, “Apple Computer, Inc.,” in Adele Hast, ed., International
Directory of Company Histories (Chicago: St. James Press, 1991), 115–116.
12. An insightful history of the emergence of the personal computer industry
appears in Paul Frieberger and Michael Swaine, Fire in the Valley: The
Making of the Personal Computer (Berkeley, CA: Osborne-McGraw Hill,
1984).
13. “Can 3.5[H11033] Drives Displace 5.25s in Personal Computing?” Electronic
Business, 1 August, 1986, 81–84.
14. Personal interview with Mr. William Schroeder, Vice Chairman, Conner
Peripherals Corporation, November 19, 1991.
15. An insightful study on the linkage among a company’s historical experience,
its capabilities, and what it consequently can and cannot do, appears in
Dorothy Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox
in Managing New Product Development,” Strategic Management Journal
(13), 1992, 111–125.
16. Personal interview with Mr. John Squires, cofounder and Executive Vice
President, Conner Peripherals Corporation, April 27, 1992.
17. See, for example, George Gilder, “The Revitalization of Everything: The Law
of the Microcosm,” Harvard Business Review, March–April, 1988, 49–62.
18. Much of this information about Allen Bradley has been taken from John
Gurda, The Bradley Legacy (Milwaukee: The Lynde and Harry Bradley
Foundation, 1992).
CHAPTER SEVEN
Discovering New and Emerging Markets
Markets that do not exist cannot be analyzed: Suppliers and customers
must discover them together. Not only are the market applications for disruptive
technologies unknown at the time of their development, they are unknowable.
The strategies and plans that managers formulate for confronting disruptive
technological change, therefore, should be plans for learning and discovery
rather than plans for execution. This is an important point to understand, because
managers who believe they know a market’s future will plan and invest very
differently from those who recognize the uncertainties of a developing market.
Most managers learn about innovation in a sustaining technology context
because most technologies developed by established companies are sustaining in
character. Such innovations are, by definition, targeted at known markets in
which customer needs are understood. In this environment, a planned,
researched approach to evaluating, developing, and marketing innovative
products is not only possible, it is critical to success.
What this means, however, is that much of what the best executives in
successful companies have learned about managing innovation is not relevant to
disruptive technologies. Most marketers, for example, have been schooled
extensively, at universities and on the job, in the important art of listening to
their customers, but few have any theoretical or practical training in how to
discover markets that do not yet exist. The problem with this lopsided
experience base is that when the same analytical and decision-making processes
learned in the school of sustaining innovation are applied to enabling or
disruptive technologies, the effect on the company can be paralyzing. These
processes demand crisply quantified information when none exists, accurate
estimates of financial returns when neither revenues nor costs can be known, and
management according to detailed plans and budgets that cannot be formulated.
Applying inappropriate marketing, investment, and management processes can
render good companies incapable of creating the new markets in which enabling
or disruptive technologies are first used.
In this chapter we shall see how experts in the disk drive industry were able
to forecast the markets for sustaining technologies with stunning accuracy but
had great difficulty in spotting the advent and predicting the size of new markets
for disruptive innovations. Additional case histories in the motorcycle and
microprocessor industries further demonstrate the uncertainty about emerging
market applications for disruptive or enabling technologies, even those that, in
retrospect, appear obvious.
FORECASTING MARKETS FOR SUSTAINING VERSUS
DISRUPTIVE TECHNOLOGIES
An unusual amount of market information has been available about the disk
drive industry from its earliest days—a major reason why studying it has yielded
such rich insights. The primary source of data, Disk/Trend Report, published
annually by Disk/Trend, Inc., of Mountain View, California, lists every model of
disk drive that has ever been offered for sale by any company in the world, for
each of the years from 1975 to the present. It shows the month and year in which
each model was first shipped, lists the performance specifications of the drive,
and details the component technologies used. In addition, every manufacturer in
the world shares with Disk/Trend its sales by product type, with information
about what types of customers bought which drive. Editors at Disk/Trend then
aggregate this data to derive the size of each narrowly defined market segment
and publish a listing of the major competitors’ shares, carefully guarding all
proprietary data. Manufacturers in the industry find the reports so valuable that
they all continue to share their proprietary data with Disk/Trend.
In each edition, Disk/Trend publishes the actual unit volumes and dollar sales
in each market segment for the year just past and offers its forecasts for each of
the next four years in each category. Given its unparalleled access to industry
data spanning two decades, this publication offers an unusual chance to test
through unfolding market history the accuracy of past predictions. Over all,
Disk/Trend has a remarkable track record in forecasting the future of established
markets, but it has struggled to estimate accurately the size of new markets
enabled by disruptive disk drive technologies.
The evidence is summarized in Figure 7.1, which compares the total unit
volumes that Disk/Trend Report had forecast would be shipped in the first four
years after commercial shipments of each new disk drive architecture began, to
the total volumes that were actually shipped over that four-year period. To
facilitate comparison, the heights of the bars measuring forecast shipments were
normalized to a value of 100, and the volumes actually shipped were scaled as a
percentage of the forecast. Of the five new architectures for which Disk/Trend’s
forecasts were available, the 14-inch Winchester and the 2.5-inch generation
were sustaining innovations, which were sold into the same value networks as
the preceding generation of drives. The other three, 5.25-, 3.5-, and 1.8-inch
drives, were disruptive innovations that facilitated the emergence of new value
networks. (Disk/Trend did not publish separate forecasts for 8-inch drives.)
Figure 7.1 The Four Years after the First Commercial Shipments: Sustaining
versus Disruptive Technologies
Source: Data are from various issues of Disk/Trend Report.
Notice that Disk/Trend’s forecasts for the sustaining 2.5-inch and 14-inch
Winchester technologies were within 8 percent and 7 percent, respectively, of
what the industry actually shipped. But its estimates were off by 265 percent for
5.25-inch drives, 35 percent for 3.5-inch drives (really quite close), and 550
percent for 1.8-inch drives. Notably, the 1.8-inch drive, the forecast of which
Disk/Trend missed so badly, was the first generation of drives with a primarily
non-computer market.
The Disk/Trend staff used the same methods to generate the forecasts for
sustaining architectures as they did for disruptive ones: interviewing leading
customers and industry experts, trend analysis, economic modeling, and so on.
The techniques that worked so extraordinarily well when applied to sustaining
technologies, however, clearly failed badly when applied to markets or
applications that did not yet exist.
IDENTIFYING THE MARKET FOR THE HP 1.3-INCH
KITTYHAWK DRIVE
Differences in the forecastablity of sustaining versus disruptive technologies
profoundly affected Hewlett-Packard’s efforts to forge a market for its
revolutionary, disruptive 1.3-inch Kittyhawk disk drive. 1 In 1991, HewlettPackard’s Disk Memory Division (DMD), based in Boise, Idaho, generated
about $600 million in disk drive revenues for its $20 billion parent company.
That year a group of DMD employees conceived of a tiny, 1.3-inch 20 MB
drive, which they code-named Kittyhawk. This was indeed a radical program for
HP: The smallest drive previously made by DMD had been 3.5-inches, and
DMD had been one of the last in the industry to introduce one. The 1.3-inch
Kittyhawk represented a significant leapfrog for the company—and, most
notably, was HP’s first attempt to lead in a disruptive technology.
For the project to make sense in a large organization with ambitious growth
plans, HP executives mandated that Kittyhawk’s revenues had to ramp to $150
million within three years. Fortunately for Kittyhawk’s proponents, however, a
significant market for this tiny drive loomed on the horizon: hand-held palm-top
computers, or personal digital assistants (PDAs). Kittyhawk’s sponsors, after
studying projections for this market, decided that they could scale the revenue
ramp that had been set for them. They consulted a market research firm, which
confirmed HP’s belief that the market for Kittyhawk would indeed be
substantial.
HP’s marketers developed deep relationships with senior executives at major
companies in the computer industry, for example, Motorola, ATT, IBM, Apple,
Microsoft, Intel, NCR, and Hewlett-Packard itself, as well as at a host of lesserknown startup companies. All had placed substantial product development bets
on the PDA market. Many of their products were designed with Kittyhawk’s
features in mind, and Kittyhawk’s design in turn reflected these customers’ wellresearched needs.
The Kittyhawk team concluded that developing a drive that met these
customers’ requirements would be a demanding but feasible technological
stretch, and they launched an aggressive twelve-month effort to develop the tiny
device. The result, shown in Figure 7.2, was impressive. The first version packed
20 MB, and a second model, introduced a year later, stored 40 MB. To meet the
ruggedness demanded in its target market of PDAs and electronic notebooks,
ruggedness demanded in its target market of PDAs and electronic notebooks,
Kittyhawk was equipped with an impact sensor similar to those used in
automobile airbag crash sensors and could withstand a three-foot drop onto
concrete without data loss. It was designed to sell initially at $250 per unit.
Although Kittyhawk’s technical development went according to plan, the
development of applications for it did not. The PDA market failed to materialize
substantially, as sales of Apple’s Newton and competing devices fell far short of
aspirations. This surprised many of the computer industry experts whose
opinions HP’s marketers had worked so hard to synthesize. During its first two
years on the market, Kittyhawk logged just a fraction of the sales that had been
forecast. The sales achieved might have initially satisfied startup companies and
venture capitalists, but for HP’s management, the volumes were far below
expectations and far too small to satisfy DMD’s need to grow and gain overall
market share. Even more surprising, the applications that contributed most
significantly to Kittyhawk’s sales were not in computers at all. They were
Japanese-language portable word processors, miniature cash registers, electronic
cameras, and industrial scanners, none of which had figured in Kittyhawk’s
original marketing plans.
Figure 7.2 Hewlett-Packard’s Kittyhawk Drive
Source: Hewlett Packard Company. Used by permission.
Even more frustrating, as the second anniversary of Kittyhawk’s launch
approached, were the inquiries received by HP marketers from companies
making mass-market video game systems to buy very large volumes of
Kittyhawk—if HP could make a version available at a lower price point. These
companies had been aware of Kittyhawk for two years, but they reported that it
had taken some time for them to see what could be done with a storage device so
small.
To a significant extent, HP had designed Kittyhawk to be a sustaining
technology for mobile computing. Along many of the metrics of value in that
application—small size, low weight and power consumption, and ruggedness—
Kittyhawk constituted a discontinuous sustaining improvement relative to 2.5and 1.8-inch drives. Only in capacity (which HP had pushed as far as possible)
was Kittyhawk deficient. The large inquiries and orders that finally began
arriving for the Kittyhawk, however, were for a truly disruptive product:
something priced at $50 per unit and with limited functionality. For these
applications, a capacity of 10 MB would have been perfectly adequate.
Unfortunately, because HP had positioned the drive with the expensive
features needed for the PDA market rather than designing it as a truly disruptive
product, it simply could not meet the price required by home video game
manufacturers. Having invested so aggressively to hit its original targets as
defined by the PDA application, management had little patience and no money
to redesign a simpler, defeatured 1.3-inch drive that fit the market applications
that had finally become clear. HP withdrew Kittyhawk from the market in late
1994.
The HP project managers concede in retrospect that their most serious
mistake in managing the Kittyhawk initiative was to act as if their forecasts
about the market were right, rather than as if they were wrong. They had
invested aggressively in manufacturing capacity for producing the volumes
forecast for the PDA market and had incorporated design features, such as the
shock sensor, that were crucial to acceptance in the PDA market they had so
carefully researched. Such planning and investment is crucial to success in a
sustaining technology, but, the managers reflected, it was not right for a
disruptive product like Kittyhawk. If they had the opportunity to launch
Kittyhawk all over again, they would assume that neither they nor anyone else
knew for sure what kinds of customers would want it or in what volumes. This
would lead them toward a much more exploratory, flexible approach toward
would lead them toward a much more exploratory, flexible approach toward
product design and investment in manufacturing capacity; they would, given
another chance, feel their way into the market, leaving enough resources to
redirect their program if necessary and building upon what they learned on the
way.
Hewlett-Packard’s disk drive makers are not the only ones, of course, who
behaved as if they knew what the market for a disruptive technology would be.
They are in stellar company, as the following case histories show.
HONDA’S INVASION OF THE NORTH AMERICAN
MOTORCYCLE INDUSTRY
Honda’s success in attacking and dominating the North American and European
motorcycle markets has been cited as a superb example of clear strategic
thinking coupled with aggressive and coherent execution. According to these
accounts, Honda employed a deliberate manufacturing strategy based on an
experience curve in which it cut prices, built volume, aggressively reduced costs,
cut prices some more, reduced costs further, and built an unassailable volumebased low-cost manufacturing position in the motorcycle market. Honda then
used that base to move upmarket and ultimately blew all established motorcycle
manufacturers out of the market except for Harley-Davidson and BMW, which
barely survived. 2 Honda combined this manufacturing triumph with a clever
product design, catchy advertising, and a convenient, broad-based
distributor/retailer network tailored to the informal cyclists who constituted
Honda’s core customer base. Told in this manner, Honda’s history is a tale of
strategic brilliance and operational excellence that all managers dream will be
told about them someday. The reality of Honda’s achievement, as recounted by
the Honda employees who were managing the business at the time, however, is
quite different. 3
During Japan’s years of post-war reconstruction and poverty, Honda had
emerged as a supplier of small, rugged motorized bicycles that were used by
distributors and retailers in congested urban areas to make small deliveries to
local customers. Honda developed considerable expertise in designing small,
efficient engines for these bikes. Its Japanese market sales grew from an initial
annual volume of 1,200 units in 1949 to 285,000 units in 1959.
Honda’s executives were eager to exploit the company’s low labor costs to
export motorbikes to North America, but there was no equivalent market there
for its popular Japanese “Supercub” delivery bike. Honda’s research showed that
Americans used motorcyles primarily for over-the-road distance driving in
which size, power, and speed were the most highly valued product attributes.
Accordingly, Honda engineers designed a fast, powerful motorcycle specifically
for the American market, and in 1959 Honda dispatched three employees to Los
Angeles to begin marketing efforts. To save living expenses, the three shared an
apartment, and each brought with him a Supercub bike to provide cheap
transportation around the city.
transportation around the city.
The venture was a frustrating experience from the beginning. Honda’s
products offered no advantage to prospective customers other than cost, and
most motorcycle dealers refused to accept the unproven product line. When the
team finally succeeded in finding some dealers and selling a few hundred units,
the results were disastrous. Honda’s understanding of engine design turned out
not to be transferable to highway applications, in which bikes were driven at
high speeds for extended periods: The engines sprung oil leaks and the clutches
wore out. Honda’s expenses in air-freighting the warrantied replacement
motorcycles between Japan and Los Angeles nearly sunk the company.
Meanwhile, one Saturday, Kihachiro Kawashima, the Honda executive in
charge of the North American venture, decided to vent his frustrations by taking
his Supercub into the hills east of Los Angeles. It helped: He felt better after
zipping around in the dirt. A few weeks later he sought relief dirt-biking again.
Eventually he invited his two colleagues to join him on their Supercubs. Their
neighbors and others who saw them zipping around the hills began inquiring
where they could buy those cute little bikes, and the trio obliged by specialordering Supercub models for them from Japan. This private use of what became
known as off-road dirt bikes continued for a couple of years. At one point a
Sears buyer tried to order Supercubs for the company’s outdoor power
equipment departments, but Honda ignored the opportunity, preferring to focus
on selling large, powerful, over-the-road cycles, a strategy that continued to be
unsuccessful.
Finally, as more and more people clamored for their own little Honda
Supercubs to join their dirt-biking friends, the potential for a very different
market dawned on Honda’s U.S. team: Maybe there was an undeveloped off-theroad recreational motorbike market in North America for which— quite by
accident—the company’s little 50cc Supercub was nicely suited. Although it
took much arguing and arm-twisting, the Los Angeles team ultimately convinced
corporate management in Japan that while the company’s large bike strategy was
doomed to failure, another quite different opportunity to create a totally new
market segment merited pursuit.
Once the small-bike strategy was formally adopted, the team found that
securing dealers for the Supercub was an even more vexing challenge than it had
been for its big bikes. There just weren’t any retailers selling that class of
product. Ultimately, Honda persuaded a few sporting goods dealers to take on its
line of motorbikes, and as they began to promote the bikes successfully, Honda’s
innovative distribution strategy was born.
innovative distribution strategy was born.
Honda had no money for a sophisticated advertising campaign. But a UCLA
student who had gone dirt-biking with his friends came up with the advertising
slogan, “You meet the nicest people on a Honda,” for a paper he wrote in an
advertising course. Encouraged by his teacher, he sold the idea to an advertising
agency, which then convinced Honda to use it in what became an award-winning
advertising campaign. These serendipitous events were, of course, followed by
truly world-class design engineering and manufacturing execution, which
enabled Honda to repeatedly lower its prices as it improved its product quality
and increased its production volumes.
Honda’s 50cc motorbike was a disruptive technology in the North American
market. The rank-ordering of product attributes that Honda’s customers
employed in their product decision making defined for Honda a very different
value network than the established network in which Harley-Davidson, BMW,
and other traditional motorcycle makers had competed.
From its low-cost manufacturing base for reliable motorbikes, using a
strategy reminiscent of the upmarket invasions described earlier in disk drives,
steel, excavators, and retailing, Honda turned its sights upmarket, introducing
between 1970 and 1988 a series of bikes with progressively more powerful
engines.
For a time in the late 1960s and early 1970s, Harley attempted to compete
head-on with Honda and to capitalize on the expanding lowend market by
producing a line of small-engine (150 to 300 cc) bikes acquired from the Italian
motorcycle maker Aeromecchania. Harley attempted to sell the bikes through its
North American dealer network. Although Honda’s manufacturing prowess
clearly disadvantaged Harley in this effort, a primary cause of Harley’s failure to
establish a strong presence in the small-bike value network was the opposition of
its dealer network. Their profit margins were far greater on high-end bikes, and
many of them felt the small machines compromised Harley-Davidson’s image
with their core customers.
Recall from chapter 2 the finding that within a given value network, the disk
drive companies and their computer-manufacturing customers had developed
very similar economic models or cost structures, which determined the sorts of
business that appeared profitable to them. We see the same phenomenon here.
Within their value network, the economics of Harley’s dealers drove them to
favor the same type of business that Harley had come to favor. Their coexistence
within the value network made it difficult for either Harley or its dealers to exit
the network through its bottom. In the late 1970s Harley gave in and
repositioned itself at the very high end of the motorcycle market—a strategy
reminiscent of Seagate’s repositioning in disk drives, and of the upmarket
retreats of the cable excavator companies and the integrated steel mills.
Interestingly, Honda proved just as inaccurate in estimating how large the
potential North American motorcycle market was as it had been in
understanding what it was. Its initial aspirations upon entry in 1959 had been to
capture 10 percent of a market estimated at 550,000 units per year with annual
growth of 5 percent. By 1975 the market had grown 16 percent per year to
5,000,000 annual units—units that came largely from an application that Honda
could not have foreseen. 4
INTEL’S DISCOVERY OF THE MICROPROCESSOR MARKET
Intel Corporation, whose founders launched the company in 1969 based on their
pioneering development of metal-on-silicon (MOS) technology to produce the
world’s first dynamic random access memory (DRAM) integrated circuits, had
become by 1995 one of the world’s most profitable major companies. Its storied
success is even more remarkable because, when its initial leadership position in
the DRAM market began crumbling between 1978 and 1986 under the onslaught
of Japanese semiconductor manufacturers, Intel transformed itself from a
second-tier DRAM company into the world’s dominant microprocessor
manufacturer. How did Intel do it?
Intel developed the original microprocessor under a contract development
arrangement with a Japanese calculator manufacturer. When the project was
over, Intel’s engineering team persuaded company executives to purchase the
microprocessor patent from the calculator maker, which owned it under the
terms of its contract with Intel. Intel had no explicit strategy for building a
market for this new microprocessor; the company simply sold the chip to
whoever seemed to be able to use it.
Mainstream as they seem today, microprocessors were disruptive
technologies when they first emerged. They were capable only of limited
functionality, compared to the complex logic circuits that constituted the central
processing units of large computers in the 1960s. But they were small and
simple, and they enabled affordable logic and computation in applications where
this previously had not been feasible.
Through the 1970s, as competition in the DRAM market intensified, margins
began to decline on Intel’s DRAM revenues while margins on its microprocessor
product line, where there was less competition, stayed robust. Intel’s system for
allocating production capacity operated according to a formula whereby capacity
was committed in proportion to the gross margins earned by each product line.
The system therefore imperceptibly began diverting investment capital and
manufacturing capacity away from the DRAM business and into
microprocessors—without an explicit management decision to do so. 5 In fact,
Intel senior management continued to focus most of its own attention and energy
on DRAM, even while the company’s resource allocation processes were
gradually implementing an exit from that business.
This de facto strategy shift, driven by Intel’s autonomously operating
resource allocation process, was fortuitous. Because so little was known of the
microprocessor market at that time, explicit analysis would have provided little
justification for a bold move into microprocessors. Gordon Moore, Intel cofounder and chairman, for example, recalled that IBM’s choice of the Intel 8088
microprocessor as the “brain” of its new personal computer was viewed within
Intel as a “small design win.” 6 Even after IBM’s stunning success with its
personal computers, Intel’s internal forecast of the potential applications for the
company’s next-generation 286 chip did not include personal computers in its
list of the fifty highest-volume applications. 7
In retrospect, the application of microprocessors to personal computers is an
obvious match. But in the heat of the battle, of the many applications in which
microprocessors might have been used, even a management team as astute as
Intel’s could not know which would emerge as the most important and what
volumes and profits it would yield.
UNPREDICTABILITY AND DOWNWARD IMMOBILITY IN
ESTABLISHED FIRMS
The reaction of some managers to the difficulty of correctly planning the
markets for disruptive technologies is to work harder and plan smarter. While
this approach works for sustaining innovations, it denies the evidence about the
nature of disruptive ones. Amid all the uncertainty surrounding disruptive
technologies, managers can always count on one anchor: Experts’ forecasts will
always be wrong. It is simply impossible to predict with any useful degree of
precision how disruptive products will be used or how large their markets will
be. An important corollary is that, because markets for disruptive technologies
are unpredictable, companies’
initial strategies for entering these markets will generally
be wrong.
How does this statement square with the findings presented in Table 6.1,
which showed a stunning difference in the posterior probabilities of success
between firms that entered new, emerging value networks (37 percent) and those
that entered existing value networks (6 percent)? If markets cannot be predicted
in advance, how can firms that target them be more successful?
Indeed, when I have shown the matrix in Table 6.1 to
managerial audiences, they are quite astonished by the
differences in the magnitudes and probabilities of
success. But it is clear that the managers don’t believe
that the results can be generalized to their own situations.
The findings violate their intuitive sense that creating
new markets is a genuinely risky business.
8
Failed Ideas versus Failed Businesses
The case studies reviewed in this chapter suggest a resolution to this puzzle.
There is a big difference between the failure of an idea and the failure of a firm.
Many of the ideas prevailing at Intel about where the disruptive microprocessor
could be used were wrong; fortunately, Intel had not expended all of its
resources implementing wrong-headed marketing plans while the right market
direction was still unknowable. As a company, Intel survived many false starts in
its search for the major market for microprocessors. Similarly, Honda’s idea
about how to enter the North American motorcycle market was wrong, but the
company didn’t deplete its resources pursuing its big-bike strategy and was able
to invest aggressively in the winning strategy after it had emerged. HewlettPackard’s Kittyhawk team was not as fortunate. Believing they had identified the
winning strategy, its managers spent their budget on a product design and the
manufacturing capacity for a market application that never emerged. When the
ultimate applications for the tiny drive ultimately began to coalesce, the
Kittyhawk team had no resources left to pursue them.
Research has shown, in fact, that the vast majority of successful new business
ventures abandoned their original business strategies when they began
implementing their initial plans and learned what would and would not work in
the market.
9
The dominant difference between successful ventures
and failed ones, generally, is not the astuteness of their
original strategy.
Guessing the right strategy at the outset isn’t nearly as
important to success as conserving enough resources (or
having the relationships with trusting backers or
investors) so that new business initiatives get a second or
third stab at getting it right. Those that run out of
resources or credibility before they can iterate toward a
viable strategy are the ones that fail.
viable strategy are the ones that fail.
Failed Ideas and Failed Managers
In most companies, however, individual managers don’t have the luxury of
surviving a string of trials and errors in pursuit of the strategy that works.
Rightly or wrongly, individual managers in most organizations believe that they
cannot fail: If they champion a project that fails because the initial marketing
plan was wrong, it will constitute a blotch on their
track record, blocking their rise through the organization.
Because failure is intrinsic to the process of finding new
markets for disruptive technologies, the inability or
unwillingness of individual managers to put their careers
at risk acts as a powerful deterrent to the movement of
established firms into the value networks created by those
technologies. As Joseph Bower observed in his classic
study of the resource allocation process at a major
chemical company, “Pressure from the market reduces
both the probability and the cost of being wrong.
10
Bower’s observation is consistent with the findings in this book about the
disk drive industry. When demand for an innovation was assured, as was the
case with sustaining technologies, the industry’s established leaders were
capable of placing huge, long, and risky bets to develop whatever technology
was required. When demand was not assured, as was the case in disruptive
technologies, the established firms could not even make the technologically
straightforward bets required to commercialize such innovations. That is why 65
percent of the companies entering the disk drive industry attempted to do so in
an established, rather than emerging market. Discovering markets for emerging
technologies inherently involves failure, and most individual decision makers
find it very difficult to risk backing a project that might fail because the market
find it very difficult to risk backing a project that might fail because the market
is not there.
Plans to Learn versus Plans to Execute
Because failure is intrinsic to the search for initial market applications for
disruptive technologies, managers need an approach very different from what
they would take toward a sustaining technology. In general, for sustaining
technologies, plans must be made before action is taken, forecasts can be
accurate, and customer inputs can be reasonably reliable. Careful planning,
followed by aggressive execution, is the right formula for success in sustaining
technology.
But in disruptive situations, action must be taken before careful plans are
made. Because much less can be known about what markets need or how large
they can become, plans must serve a very different purpose: They must be plans
for learning rather than plans for implementation. By approaching a disruptive
business with the mindset that they can’t know where the market is, managers
would identify what critical information about new markets is most necessary
and in what sequence that information is needed. Project and business plans
would mirror those priorities, so that key pieces of information would be created,
or important uncertainties resolved, before expensive commitments of capital,
time, and money were required.
Discovery-driven planning, which requires managers to identify the
assumptions upon which their business plans or aspirations are based, 11 works
well in addressing disruptive technologies. In the case of Hewlett-Packard’s
Kittyhawk disk drive, for example, HP invested significant sums with its
manufacturing partner, the Citizen Watch Company, in building and tooling a
highly automated production line. This commitment was based on an assumption
that the volumes forecast for the drive, built around forecasts by HP customers
of PDA sales, were accurate. Had HP’s managers instead assumed that nobody
knew in what volume PDAs would sell, they might have built small modules of
production capacity rather than a single, high-volume line. They could then have
held to capacity or added or reduced capacity as key events confirmed or
disproved their assumptions.
Similarly, the Kittyhawk product development plan was based on an
assumption that the dominant application for the little drive was in PDAs, which
demanded high ruggedness. Based on this assumption, the Kittyhawk team
committed to components and a product architecture that made the product too
expensive to be sold to the price-sensitive video game makers at the emerging
low end of the market. Discovery-driven planning would have forced the team to
test its market assumptions before making commitments that were expensive to
reverse—in this case, possibly by creating a modularized design that easily could
be reconfigured or defeatured to address different markets and price points, as
events in the marketplace clarified the validity of their assumptions.
Philosophies such as management by objective and management by exception
often impede the discovery of new markets because of where they focus
management attention. Typically, when performance falls short of plan, these
systems encourage management to close the gap between what was planned and
what happened. That is, they focus on unanticipated failures. But as Honda’s
experience in the North American motorcycle market illustrates, markets for
disruptive technologies often emerge from unanticipated successes, on which
many planning systems do not focus the attention of senior management. 12 Such
discoveries often come by watching how people use products, rather than by
listening to what they say.
I have come to call this approach to discovering the emerging markets for
disruptive technologies agnostic marketing, by which I mean marketing under an
explicit assumption that no one—not us, not our customers—can know whether,
how, or in what quantities a disruptive product can or will be used before they
have experience using it. Some managers, faced with such uncertainty, prefer to
wait until others have defined the market. Given the powerful first-mover
advantages at stake, however, managers confronting disruptive technologies
need to get out of their laboratories and focus groups and directly create
knowledge about new customers and new applications through discovery-driven
expeditions into the marketplace.
NOTES
1. What follows is a summary of the fuller history recounted in “HewlettPackard: The Flight of the Kittyhawk,” Harvard Business School, Case No. 9697-060, 1996.
2. Examples of such histories of Honda’s success include the Harvard Business
School case study, “A Note on the Motorcycle Industry—1975,” No. 9-578210, and a report published by The Boston Consulting Group, “Strategy
Alternatives for the British Motorcycle Industry,” 1975.
3. Richard Pascale and E. Tatum Christiansen, “Honda (A),” Harvard Business
School Teaching, Case No. 9-384-049, 1984, and “Honda (B),” Harvard
Business School, Teaching Case No. 9-384-050, 1984.
4. Statistical Abstract of the United States (Washington, D.C.: United States
Bureau of the Census, 1980), 648.
5. Intel’s exit from the DRAM business and entry into microprocessors has been
chronicled by Robert A. Burgelman in “Fading Memories: A Process Theory
of Strategic Business Exit in Dynamic Environments,” Administrative Science
Quarterly (39), 1994, 24–56. This thoroughly researched and compellingly
written study of the process of strategy evolution is well worth reading.
6. George W. Cogan and Robert A. Burgelman, “Intel Corporation (A): The
DRAM Decision,” Stanford Business School, Case PS-BP-256.
7. Robert A. Burgelman, “Fading Memories: A Process Theory of Strategic
Business Exit in Dynamic Environments,” Administrative Science Quarterly
(39) 1994.
8. Studies of how managers define and perceive risk can shed significant light on
this puzzle. Amos Tversky and Daniel Kahneman, for example, have shown
that people tend to regard propositions that they do not understand as more
risky, regardless of their intrinsic risk, and to regard things they do understand
as less risky, again without regard to intrinsic risk. (Amos Tversky and Daniel
Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science
[185], 1974, 1124–1131.) Managers, therefore, may view creation of new
markets as risky propositions, in the face of contrary evidence, because they
do not understand non-existent markets; similarly, they may regard investment
in sustaining technologies, even those with high intrinsic risk, as safe because
they understand the market need.
9. Among the excellent studies in this tradition are Myra M. Hart, Founding
Resource Choices: Influences and Effects, DBA thesis, Harvard University
Graduate School of Business Administration, 1995; Amar Bhide, “How
Entrepreneurs Craft Strategies that Work,” Harvard Business Review, March–
April, 1994, 150–163; Amar Bhide, “Bootstrap Finance: The Art of StartUps,” Harvard Business Review, November–December 1992, 109–118;
“Hewlett-Packard’s Kittyhawk,” Harvard Business School, Case No. 9-697060; and “Vallourec’s Venture into Metal Injection Molding,” Harvard
Business School, Case No. 9-697-001.
10. Joseph Bower, Managing the Resource Allocation Process (Homewood, IL:
Richard D. Irwin, 1970), 254.
11. Rita G. McGrath and Ian C. MacMillan, “Discovery-Driven Planning,”
Harvard Business Review, July–August, 1995, 4–12.
12. This point is persuasively argued in Peter F. Drucker, Innovation and
Entrepreneurship (New York: Harper & Row, 1985). Below, in chapter 9, I
recount how software maker Intuit discovered that many of the people buying
its Quicken personal financial management software were, in fact, using it to
keep the books of their small businesses. Intuit had not anticipated this
application, but it consequently adapted the product more closely to small
business needs and launched Quickbooks, which captured more than 70
percent of the small business accounting software market within two years.
CHAPTER EIGHT
How to Appraise Your Organization’s
Capabilities and Disabilities
When managers assign employees to tackle a critical innovation, they
instinctively work to match the requirements of the job with the capabilities of
the individuals whom they charge to do it. In evaluating whether an employee is
capable of successfully executing a job, managers will assess whether he or she
has the requisite knowledge, judgment, skill, perspective, and energy.
Managers will also assess the employee’s values—the
criteria by which he or she tends to decide what should
and shouldn’t be done. Indeed, the hallmark of a great
manager is the ability to identify the right person for the
right job, and to train his or her employees so that they
have the capabilities to succeed at the jobs they are given.
Unfortunately, some managers don’t think as rigorously about whether their
organizations have the capability to successfully execute jobs that may be given
to them. Frequently, they assume that if the people working on a project
individually have the requisite capabilities to get the job done well, then the
organization in which they work will also have the same capability to succeed.
This often is not the case. One could take two sets of identically capable people
and put them to work in two different organizations, and what they accomplish
would likely be significantly different.
This is because organizations themselves, independent of
the people and other resources in them, have capabilities.
To succeed consistently,
good managers need to be skilled not just in choosing,
training, and motivating the right people for the right job,
but in choosing, building, and preparing the right
organization for the job as well.
The purpose of this chapter is to describe the theory that lies behind the
empirical observations made in chapters 5, 6, and 7—in particular, the
observation that the only companies that succeeded in addressing disruptive
technology were those that created independent organizations whose size
matched the size of the opportunity. The notion that organizations have “core
competencies” has been a popular one for much of the last decade.
1
In practice, however, most managers have found that
the concept is sufficiently vague that some supposed
“competence” can be cited in support of a bewildering
variety of innovation proposals. This chapter brings
greater precision to the core competence concept, by
presenting a framework to help managers understand,
when they are confronted with a necessary change,
whether the organizations over which they preside are
competent or incompetent of tackling the challenges that
lie ahead.
AN ORGANIZATIONAL CAPABILITIES FRAMEWORK
Three classes of factors affect what an organization can and cannot do: its
resources, its processes, and its values. When asking what sorts of innovations
their organizations are and are not likely to be able to implement successfully,
managers can learn a lot about capabilities by disaggre-gating their answers into
these three categories.
2
Resources
Resources are the most visible of the factors that contribute to what an
organization can and cannot do. Resources include people, equipment,
technology, product designs, brands, information, cash, and relationships with
suppliers, distributors, and customers. Resources are usually things, or assets—
they can be hired and fired, bought and sold, depreciated or enhanced. They
often can be transferred across the boundaries of organizations much more
readily than can processes and values. Without doubt, access to abundant and
high-quality resources enhances an organization’s chances of coping with
change.
Resources are the things that managers most instinctively identify when
assessing whether their organizations can successfully implement changes
that confront them. Yet resource analysis clearly does not
tell a sufficient story about capabilities. Indeed, we could
deal identical sets of resources to two different
organizations, and what they created from those resources
would likely be very different—because the capabilities
to transform inputs into goods and services of greater
value reside in the organization’s processes and values.
Processes
Organizations create value as employees transform inputs of resources— people,
equipment, technology, product designs, brands, information, energy, and cash
—into products and services of greater worth. The patterns of interaction,
coordination, communication, and decision-making through which they
accomplish these transformations are processes. 3 Processes include not just
manufacturing processes, but those by which product development,
procurement, market research, budgeting, planning, employee development and
compensation, and resource allocation are accomplished.
Processes differ not only in their purpose, but also in their visibility. Some
processes are “formal,” in the sense that they are explicitly defined, visibly
documented, and consciously followed. Other processes are “informal,” in that
they are habitual routines or ways of working that have evolved over time, which
people follow simply because they work—or because “That’s the way we do
things around here.” Still other methods of working and interacting have proven
so effective for so long that people unconsciously follow them—they constitute
the culture of the organization. Whether they are formal, informal, or cultural,
however, processes define how an organization transforms the sorts of inputs
listed above into things of greater value.
Processes are defined or evolve de facto to address specific tasks. This means
that when managers use a process to execute the tasks for which it was designed,
it is likely to perform efficiently. But when the same, seemingly efficient process
is employed to tackle a very different task, it is likely to seem slow, bureaucratic,
and inefficient. In other words, a process that defines a capability in executing a
certain task concurrently defines disabilities in executing other tasks. 4 The
reason good managers strive for focus in their organizations is that processes and
tasks can be readily aligned. 5
One of the dilemmas of management is that, by their very nature, processes
are established so that employees perform recurrent tasks in a consistent way,
time after time. To ensure consistency, they are meant not to change—or if they
must change, to change through tightly controlled procedures. This means that
the very mechanisms through which organizations create value are intrinsically
inimical to change.
Some of the most crucial processes to examine as capabilities or disabilities
aren’t the obvious value-adding processes involved in logistics, development,
manufacturing, and customer service. Rather, they are the enabling or
background processes that support investment decision-making. As we saw in
chapter 7, the processes that render good companies incapable of responding to
change are often those that define how market research is habitually done; how
such analysis is translated into financial projections; how plans and budgets are
negotiated and how those numbers are delivered; and so on. These typically
inflexible processes are where many organizations’ most serious disabilities in
coping with change reside.
Values
The third class of factors that affect what an organization can or cannot
accomplish is its values. The values of an organization are the criteria by which
decisions about priorities are made. Some corporate values are ethical in tone,
such as those that guide decisions to ensure patient well-being at Johnson &
Johnson or that guide decisions about plant safety at Alcoa. But within the
Resources-Processes-Values (RPV) framework, values have a broader meaning.
An organization’s values are the standards by which employees make
prioritization decisions—by which they judge whether an order is attractive or
unattractive; whether a customer is more important or less important; whether an
idea for a new product is attractive or marginal; and so on. Prioritization
decisions are made by employees at every level. At the executive tiers, they
often take the form of decisions to invest or not invest in new products, services,
and processes. Among salespeople, they consist of on-the-spot, day-to-day
decisions about which products to push with customers and which not to
emphasize.
The larger and more complex a company becomes, the more important it is
for senior managers to train employees at every level to make independent
decisions about priorities that are consistent with the strategic direction and the
business model of the company. A key metric of good management, in fact, is
whether such clear and consistent values have permeated the organization. 6
Clear, consistent, and broadly understood values, however, also define what
an organization cannot do. A company’s values, by necessity, must reflect its
cost structure or its business model, because these define the rules its employees
must follow in order for the company to make money. If, for example, the
structure of a company’s overhead costs requires it to achieve gross profit
margins of 40 percent, a powerful value or decision rule will have evolved that
encourages middle managers to kill ideas that promise gross margins below 40
percent. This means that such an organization would be incapable of
successfully commercializing projects targeting low-margin markets. At the
same time, another organization’s values, driven by a very different cost
structure, might enable or facilitate the success of the very same project.
The values of successful firms tend to evolve in a predictable fashion in at
least two dimensions. The first relates to acceptable gross margins. As
companies add features and functionality to their products and services in order
companies add features and functionality to their products and services in order
to capture more attractive customers in premium tiers of their markets, they
often add overhead cost. As a result, gross margins that at one point were quite
attractive, at a later point seem unattractive. Their values change. For example,
Toyota entered the North American market with its Corona model—a product
targeting the lowest-priced tiers of the market. As the entry tier of the market
became crowded with look-alike models from Nissan, Honda, and Mazda,
competition among equally low-cost competitors drove down profit margins.
Toyota developed more sophisticated cars targeted at higher tiers of the market
in order to improve its margins. Its Corolla, Camry, Previa, Avalon, and Lexus
families of cars have been introduced in response to the same competitive
pressures—it kept its margins healthy by migrating up-market. In the process,
Toyota has had to add costs to its operation to design, build, and support cars of
this caliber. It progressively deemphasized the entry-level tiers of the market,
having found the margins it could earn there to be unattractive, given its changed
cost structure.
Nucor Steel, the leading minimill that led the up-market charge against the
integrated mills that was recounted in chapter 4, likewise has experienced a
change in values. As it has managed the center of gravity in its product line upmarket from re-bar to angle iron to structural beams and finally to sheet steel, it
has begun to decidedly deemphasize re-bar—the product that had been its bread
and butter in its earlier years.
The second dimension along which values predictably change relates to how
big a business has to be in order to be interesting. Because a company’s stock
price represents the discounted present value of its projected earnings stream,
most managers typically feel compelled not just to maintain growth, but to
maintain a constant rate of growth. In order for a $40 million company to grow
25 percent, it needs to find $10 million in new business the next year. For a $40
billion company to grow 25 percent, it needs to find $10 billion in new business
the next year. The size of market opportunity that will solve each of these
companies’ needs for growth is very different. As noted in chapter 6, an
opportunity that excites a small organization isn’t big enough to be interesting to
a very large one. One of the bittersweet rewards of success is, in fact, that as
companies become large, they literally lose the capability to enter small
emerging markets. This disability is not because of a change in the resources
within the companies—their resources typically are vast. Rather, it is because
their values change.
Executives and Wall Street financiers who engineer megamergers among
already huge companies in order to achieve cost savings need to account for the
impact of these actions on the resultant companies’ values. Although their
merged organizations might have more resources to throw at innovation
problems, their commercial organizations tend to lose their appetites for all but
the biggest blockbuster opportunities. Huge size constitutes a very real disability
in managing innovation. In many ways, Hewlett-Packard’s recent decision to
split itself into two companies is rooted in its recognition of this problem.
THE RELATIONSHIP BETWEEN PROCESSES AND VALUES,
AND SUCCESS IN ADDRESSING SUSTAINING VS.
DISRUPTIVE TECHNOLOGIES
The resources-processes-values (RPV) framework has been a useful tool for me
to understand the findings from my research relating to the differences in
companies’ track records in sustaining and disruptive technologies. Recall that
we identified 116 new technologies that were introduced in the industry’s
history. Of these, 111 were sustaining technologies, in that their impact was to
improve the performance of disk drives. Some of these were incremental
improvements while others, such as magneto-resistive heads, represented
discontinuous leaps forward in performance. In all 111 cases of sustaining
technology, the companies that led in developing and introducing the new
technology were the companies that had led in the old technology. The success
rate of the established firms in developing and adopting sustaining technologies
was 100 percent.
The other five of these 116 technologies were disruptive innovations—in
each case, smaller disk drives that were slower and had lower capacity than
those used in the mainstream market. There was no new technology involved in
these disruptive products. Yet none of the industry’s leading companies
remained atop the industry after these disruptive innovations entered the market
—their batting average was zero.
Why such markedly different batting averages when playing the sustaining
versus disruptive games? The answer lies in the RPV framework of
organizational capabilities. The industry leaders developed and introduced
sustaining technologies over and over again. Month after month, year after year,
as they introduced new and improved products in order to gain an edge over the
competition, the leading companies developed processes for evaluating the
technological potential and assessing their customers’ needs for alternative
sustaining technologies. In the parlance of this chapter, the organizations
developed a capability for doing these things, which resided in their processes.
Sustaining technology investments also fit the values of the leading companies,
in that they promised higher margins from better products sold to their leadingedge customers.
On the other hand, the disruptive innovations occurred so intermittently that
no company had a routinized process for handling them. Furthermore, because
the disruptive products promised lower profit margins per unit sold and could
not be used by their best customers, these innovations were inconsistent with the
leading companies’ values. The leading disk drive companies had the resources
—the people, money, and technology—required to succeed at both sustaining
and disruptive technologies. But their processes and values constituted
disabilities in their efforts to succeed at disruptive technologies.
Large companies often surrender emerging growth markets because smaller,
disruptive companies are actually more capable of pursuing them. Though startups lack resources, it doesn’t matter. Their values can embrace small markets,
and their cost structures can accommodate lower margins. Their market research
and resource allocation processes allow managers to proceed intuitively rather
than having to be backed up by careful research and analysis, presented in
PowerPoint. All of these advantages add up to enormous opportunity or looming
disaster—depending upon your perspective.
Managers who face the need to change or innovate, therefore, need to do
more than assign the right resources to the problem. They need to be sure that
the organization in which those resources will be working is itself capable of
succeeding—and in making that assessment, managers must scrutinize whether
the organization’s processes and values fit the problem.
THE MIGRATION OF CAPABILITIES
In the start-up stages of an organization, much of what gets done is attributable
to its resources—its people. The addition or departure of a few key people can
have a profound influence on its success. Over time, however, the locus of the
organization’s capabilities shifts toward its processes and values. As people
work together successfully to address recurrent tasks, processes become defined.
And as the business model takes shape and it becomes clear which types of
business need to be accorded highest priority, values coalesce. In fact, one
reason that many soaring young companies flame out after they go public based
upon a hot initial product is that whereas their initial success was grounded in
resources— the founding group of engineers—they fail to create processes that
can create a sequence of hot products.
An example of such flame out is the story of Avid Technology, a producer of
digital editing systems for television. Avid’s technology removed tedium from
the video editing process. Customers loved it, and on the back of its star product,
Avid stock rose from $16 at its 1993 IPO to $49 in mid-1995. However, the
strains of being a one-trick pony soon surfaced as Avid was faced with a
saturated market, rising inventories and receivables, and increased competition.
Customers loved the product, but Avid’s lack of effective processes to
consistently develop new products and to control quality, delivery, and service
ultimately tripped the company and sent its stock back down.
In contrast, at highly successful firms such as McKinsey and Company, the
processes and values have become so powerful that it almost doesn’t matter
which people get assigned to which project teams. Hundreds of new MBAs join
the firm every year, and almost as many leave. But the company is able to crank
out high-quality work year after year because its core capabilities are rooted in
its processes and values rather than in its resources. I sense, however, that these
capabilities of McKinsey also constitute its disabilities. The rigorously
analytical, data-driven processes that help it create value for its clients in
existing, relatively stable markets render it much less capable of building a
strong client base among the rapidly growing companies in dynamic technology
markets.
In the formative stages of a company’s processes and values, the actions and
attitudes of the company’s founder have a profound impact. The founder often
has strong opinions about the way employees ought to work together to reach
has strong opinions about the way employees ought to work together to reach
decisions and get things done. Founders similarly impose their views of what the
organization’s priorities need to be. If the founder’s methods are flawed, of
course, the company will likely fail. But if those methods are useful, employees
will collectively experience for themselves the validity of the founder’s problemsolving methodologies and criteria for decision-making. As they successfully use
those methods of working together to address recurrent tasks, processes become
defined. Likewise, if the company becomes financially successful by prioritizing
various uses of its resources according to criteria that reflect the founder’s
priorities, the company’s values begin to coalesce.
As successful companies mature, employees gradually come to assume that
the priorities they have learned to accept, and the ways of doing things and
methods of making decisions that they have employed so successfully, are the
right way to work. Once members of the organization begin to adopt ways of
working and criteria for making decisions by assumption, rather than by
conscious decision, then those processes and values come to constitute the
organization’s culture. 7 As companies grow from a few employees to hundreds
and thousands, the challenge of getting all employees to agree on what needs to
be done and how it should be done so that the right jobs are done repeatedly and
consistently can be daunting for even the best managers. Culture is a powerful
management tool in these situations. Culture enables employees to act
autonomously and causes them to act consistently.
Hence, the location of the most powerful factors that define the capabilities
and disabilities of organizations migrates over time —from resources toward
visible, conscious processes and values, and then toward culture. As long as the
organization continues to face the same sorts of problems that its processes and
values were designed to address, managing the organization is relatively
straightforward. But because these factors also define what an organization
cannot do, they constitute disabilities when the problems facing the company
change. When the organization’s capabilities reside primarily in its people,
changing to address new problems is relatively simple. But when the capabilities
have come to reside in processes and values and especially when they have
become embedded in culture, change can become extraordinarily difficult.
A case in point: Did Digital Equipment have the capability to
succeed in personal computers?
Digital Equipment Corporation (DEC) was a spectacularly successful maker of
minicomputers from the 1960s through the 1980s. One might have been tempted
to assert, when the personal computer market began to coalesce in the early
1980s, that DEC’s “core competence” was in building computers. But if
computers were DEC’s competence, why did the company stumble?
Clearly, DEC had the resources to succeed in personal computers. Its
engineers were routinely designing far more sophisticated computers than PCs.
DEC had plenty of cash, a great brand, and strong technology. But did DEC
have the processes to succeed in the personal computer business? No. The
processes for designing and manufacturing minicomputers involved designing
many of the key components of the computer internally and then integrating the
components into proprietary configurations. The design process itself consumed
two to three years for a new product model. DEC’s manufacturing processes
entailed making most components and assembling them in a batch mode. It sold
direct to corporate engineering organizations. These processes worked extremely
well in the minicomputer business.
The personal computer business, in contrast, required processes through
which the most cost-effective components were outsourced from the best
suppliers around the globe. New computer designs, comprised of modular
components, had to be completed in six-to twelve-month cycles. The computers
were manufactured in high-volume assembly lines, and sold through retailers to
consumers and businesses. None of these processes required to compete
successfully in the personal computer business existed within DEC. In other
words, although the people working at DEC, as individuals, had the abilities to
design, build, and sell personal computers profitably, they were working in an
organization that was incapable of doing this because its processes had been
designed and had evolved to do other tasks well. The very processes that made
the company capable of succeeding in one business rendered it incapable of
succeeding in another.
And what about DEC’s values? Because of the overhead costs that were
required to succeed in the minicomputer business, DEC had to adopt a set of
values that essentially dictated, “If it generates 50 percent gross margins or
more, it’s good business. If it generates less than 40 percent margins, it’s not
worth doing.” Management had to ensure that all employees prioritized projects
according to this criterion, or the company couldn’t make money. Because
personal computers generated lower margins, they did not “fit” with DEC’s
values. The company’s criteria for prioritization placed higher-performance
minicomputers ahead of personal computers in the resource allocation process.
And any attempts that the company made to enter the personal computer
business had to target the highest-margin tiers of that market—because the
financial results that might be earned in those tiers were the only ones that the
company’s values would tolerate. But because of the patterns noted in chapter 4
—the strong tendency for competitors with low-overhead business models to
migrate upmarket—Digital’s values rendered it incapable of pursuing a winning
strategy.
As we saw in chapter 5, Digital Equipment could have owned another
organization whose processes and values were tailored to those required to play
in the personal computer game. But the particular organization in Maynard,
Massachusetts, whose extraordinary capabilities had carried the company to such
success in the minicomputer business, was simply incapable of succeeding in the
personal computer world.
CREATING CAPABILITIES TO COPE WITH CHANGE
If a manager determined that an employee was incapable of succeeding at a task,
he or she would either find someone else to do the job or carefully train the
employee to be able to succeed. Training often works, because individuals can
become skilled at multiple tasks.
Despite beliefs spawned by popular change-management and reengineering
programs, processes are not nearly as flexible or “trainable” as are resources—
and values are even less so. The processes that make an organization good at
outsourcing components cannot simultaneously make it good at developing and
manufacturing components in-house. Values that focus an organization’s
priorities on high-margin products cannot simultaneously focus priorities on
low-margin products. This is why focused organizations perform so much better
than unfocused ones: their processes and values are matched carefully with the
set of tasks that need to be done.
For these reasons, managers who determine that an organization’s
capabilities aren’t suited for a new task, are faced with three options through
which to create new capabilities. They can:
Acquire a different organization whose processes and values are a close
match with the new task
Try to change the processes and values of the current organization
Separate out an independent organization and develop within it the new
processes and values that are required to solve the new problem
Creating Capabilities Through Acquisitions
Managers often sense that acquiring rather than developing a set of capabilities
makes competitive and financial sense. The RPV model can be a useful way to
frame the challenge of integrating acquired organizations. Acquiring managers
need to begin by asking, “What is it that really created the value that I just paid
so dearly for? Did I justify the price because of its resources—its people,
products, technology, market position, and so on? Or, was a substantial portion
of its worth created by processes and values—unique ways of working and
decision-making that have enabled the company to understand and satisfy
customers, and develop, make, and deliver new products and services in a timely
way?
If the acquired company’s processes and values are the real driver of its
success, then the last thing the acquiring manager wants to do is to integrate the
company into the new parent organization. Integration will vaporize many of the
processes and values of the acquired firm as its managers are required to adopt
the buyer’s way of doing business and have their proposals to innovate evaluated
according to the decision criteria of the acquiring company. If the acquiree’s
processes and values were the reason for its historical success, a better strategy is
to let the business stand alone, and for the parent to infuse its resources into the
acquired firm’s processes and values. This strategy, in essence, truly constitutes
the acquisition of new capabilities.
If, on the other hand, the company’s resources were the primary rationale for
the acquisition, then integrating the firm into the parent can make a lot of sense
—essentially plugging the acquired people, products, technology, and customers
into the parent’s processes, as a way of leveraging the parent’s existing
capabilities.
The perils of the DaimlerChrysler merger that began in the late 1990s, for
example, can be better understood through the RPV model. Chrysler had few
resources that could be considered unique in comparison to its competitors. Its
success in the market of the 1990s was rooted in its processes—particularly in its
rapid, creative product design processes, and in its processes of integrating the
efforts of its subsystem suppliers. What would be the best way for Daimler to
leverage the capabilities that Chrysler brought to the table? Wall Street exerted
nearly inexorable pressure on management to consolidate the two organizations
in order to cut costs. However, integrating the two companies would likely
vaporize the key processes that made Chrysler such an attractive acquisition in
vaporize the key processes that made Chrysler such an attractive acquisition in
the first place.
This situation is reminiscent of IBM’s 1984 acquisition of Rolm. There
wasn’t anything in Rolm’s pool of resources that IBM didn’t already have. It
was Rolm’s processes for developing PBX products and for finding new markets
for them that was really responsible for its success. In 1987 IBM decided to fully
integrate the company into its corporate structure. Trying to push Rolm’s
resources—its products and its customers—through the same processes that
were honed in its large computer business, caused the Rolm business to stumble
badly. And inviting executives of a computer company whose values had been
whetted on operating profit margins of 18 percent to get excited about
prioritizing products with operating margins below 10 percent was impossible.
IBM’s decision to integrate Rolm actually destroyed the very source of the
original worth of the deal. As this chapter is being written in February 2000,
DaimlerChrysler, bowing to the investment community’s drumbeat for
efficiency savings, now stands on the edge of the same precipice.
Often, it seems, financial analysts have a better intuition for the value of
resources than for processes.
In contrast, Cisco Systems’ acquisitions process has worked well— because
its managers seem to have kept resources, processes, and values in the right
perspective. Between 1993 and 1997 it acquired primarily small companies that
were less than two years old: early-stage organizations whose market value was
built primarily upon their resources— particularly engineers and products. Cisco
has a well-defined, deliberate process by which it essentially plugs these
resources into the parent’s processes and systems, and it has a carefully
cultivated method of keeping the engineers of the acquired company happily on
the Cisco payroll. In the process of integration, Cisco throws away whatever
nascent processes and values came with the acquisition—because those weren’t
what Cisco paid for. On a couple of occasions when the company acquired a
larger, more mature organization—notably its 1996 acquisition of StrataCom—
Cisco did not integrate. Rather, it let StrataCom stand alone, and infused its
substantial resources into the organization to help it grow at a more rapid rate. 8
On at least three occasions, Johnson & Johnson has used acquisitions to
establish a position in an important wave of disruptive technology. Its businesses
in disposable contact lenses, endoscopic surgery, and diabetes blood glucose
meters were all acquired when they were small, were allowed to stand alone, and
were infused with resources. Each has become a billion-dollar business. Lucent
Technologies and Nortel followed a similar strategy for catching the wave of
Technologies and Nortel followed a similar strategy for catching the wave of
routers, based upon packet-switching technology, that were disrupting their
traditional circuit-switching equipment. But they made these acquisitions late
and the firms they acquired, Ascend Communications and Bay Networks,
respectively, were extraordinarily expensive because they had already created
the new market application, data networks, along with the much larger Cisco
Systems—and they were right on the verge of attacking the voice network.
Creating New Capabilities Internally
Companies that have tried to develop new capabilities within established
organizational units also have a spotty track record, unfortunately. Assembling a
beefed-up set of resources as a means of changing what an existing organization
can do is relatively straightforward. People with new skills can be hired,
technology can be licensed, capital can be raised, and product lines, brands, and
information can be acquired. Too often, however, resources such as these are
then plugged into fundamentally unchanged processes—and little change results.
For example, through the 1970s and 1980s Toyota upended the world
automobile industry through its innovation in development, manufacturing, and
supply-chain processes— without investing aggressively in resources such as
advanced manufacturing or information-processing technology. General Motors
responded by investing nearly $60 billion in manufacturing resources—
computer-automated equipment that was designed to reduce cost and improve
quality. Using state-of-the-art resources in antiquated processes, however, made
little difference in General Motors’ performance, because it is in its processes
and values that the organization’s most fundamental capabilities lie. Processes
and values define how resources—many of which can be bought and sold, hired
and fired—are combined to create value.
Unfortunately, processes are very hard to change—for two reasons. The first
is that organizational boundaries are often drawn to facilitate the operation of
present processes. Those boundaries can impede the creation of new processes
that cut across those boundaries. When new challenges require different people
or groups to interact differently than they habitually have done—addressing
different challenges with different timing than historically had been required—
managers need to pull the relevant people out of the existing organization and
draw a new boundary around a new group. New team boundaries enable or
facilitate new patterns of working together that ultimately can coalesce as new
processes—new capabilities for transforming inputs into outputs. Professors
Steven C. Wheelwright and Kim B. Clark have called these structures
heavyweight teams. 9
The second reason new process capabilities are hard to develop is that, in
some cases, managers don’t want to throw the existing processes out—the
methods work perfectly well in doing what they were designed to do. As noted
above, while resources tend to be flexible and can be used in a variety of
situations, processes and values are by their very nature inflexible. Their very
raison d’e^tre is to cause the same thing to be done consistently, over and over
again. Processes are meant not to change.
When disruptive change appears on the horizon, managers need to assemble
the capabilities to confront the change before it has affected the mainstream
business. In other words, they need an organization that is geared toward the
new challenge before the old one, whose processes are tuned to the existing
business model, has reached a crisis that demands fundamental change.
Because of its task-specific nature, it is impossible to ask one process to do
two fundamentally different things. Consider the examples presented in chapter
7, for instance. The market research and planning processes that are appropriate
for the launch of new products into existing markets simply aren’t capable of
guiding a company into emerging, poorly defined markets. And the processes by
which a company would experimentally and intuitively feel its way into
emerging markets would constitute suicide if employed in a well-defined
existing business. If a company needs to do both types of tasks simultaneously,
then it needs two very different processes. And it is very difficult for a single
organizational unit to employ fundamentally different, opposing processes. As
shown below, this is why managers need to create different teams, within which
different processes to address new problems can be defined and refined.
Creating Capabilities Through a Spin-out Organization
The third mechanism for new capability creation—spawning them within spinout ventures—is currently en vogue among many managers as they wrestle with
how to address the Internet. When are spin-outs a crucial step in building new
capabilities to exploit change, and what are the guidelines by which they should
be managed? A separate organization is required when the mainstream
organization’s values would render it incapable of focusing resources on the
innovation project. Large organizations cannot be expected to allocate freely the
critical financial and human resources needed to build a strong position in small,
emerging markets. And it is very difficult for a company whose cost structure is
tailored to compete in high-end markets to be profitable in low-end markets as
well. When a threatening disruptive technology requires a different cost structure
in order to be profitable and competitive, or when the current size of the
opportunity is insignificant relative to the growth needs of the mainstream
organization, then—and only then—is a spin-out organization a required part of
the solution.
How separate does the effort need to be? The primary requirement is that the
project cannot be forced to compete with projects in the mainstream organization
for resources. Because values are the criteria by which prioritization decisions
are made, projects that are inconsistent with a company’s mainstream values will
naturally be accorded lowest priority. Whether the independent organization is
physically separate is less important than is its independence from the normal
resource allocation process.
In our studies of this challenge, we have never seen a company succeed in
addressing a change that disrupts its mainstream values absent the personal,
attentive oversight of the CEO—precisely because of the power of processes and
values and particularly the logic of the normal resource allocation process. Only
the CEO can ensure that the new organization gets the required resources and is
free to create processes and values that are appropriate to the new challenge.
CEOs who view spin-outs as a tool to get disruptive threats off of their personal
agendas are almost certain to meet with failure. We have seen no exceptions to
this rule.
The framework summarized in Figure 8.1 can help managers exploit the
capabilities that reside in their current processes and values when that is
possible, and to create new ones, when the present organization is incapable. The
left axis in Figure 8.1 measures the extent to which the existing processes—the
patterns of interaction, communication, coordination, and decision-making
currently used in the organization—are the ones that will get the new job done
effectively. If the answer is yes (toward the lower end of the scale), the project
manager can exploit the organization’s existing processes and organizational
structure to succeed. As depicted in the corresponding position on the right axis,
functional or lightweight teams, as described by Clark and Wheelwright, 10 are
useful structures for exploiting existing capabilities. In such teams, the role of
the project manager is to facilitate and coordinate work that is largely done
within functional organizations.
Figure 8.1 Fitting an Innovation’s Requirements with the Organization’s
Capabilities
Note: The left and bottom axes reflect the questions the manager needs to ask
about the existing situation. The notes at the right side represent the appropriate
response to the situation on the left axis. The notes at the top represent the
appropriate response to the manager’s answer to the bottom axis.
On the other hand, if the ways of getting work done and of decision-making
in the mainstream business would impede rather than facilitate the work of the
new team—because different people need to interact with different people about
different subjects and with different timing than has habitually been necessary—
then a heavyweight team structure is necessary. Heavyweight teams are tools to
create new processes—new ways of working together that constitute new
capabilities. In these teams, members do not simply represent the interests and
skills of their function. They are charged to act like general managers, and reach
decisions and make trade-offs for the good of the project. They typically are
dedicated and colocated.
The horizontal axis of Figure 8.1 asks managers to assess whether the
organization’s values will allocate to the new initiative the resources it will need
in order to become successful. If there is a poor, disruptive fit, then the
mainstream organization’s values will accord low priority to the project.
Therefore, setting up an autonomous organization within which development
and commercialization can occur will be absolutely essential to success. At the
other extreme, however, if there is a strong, sustaining fit, then the manager can
expect that the energy and resources of the mainstream organization will
coalesce behind it. There is no reason for a skunk works or a spin-out in such
cases.
Region A in Figure 8.1 depicts a situation in which a manager is faced with a
breakthrough but sustaining technological change—it fits the organization’s
values. But it presents the organization with different types of problems to solve
and therefore requires new types of interaction and coordination among groups
and individuals. The manager needs a heavyweight development team to tackle
the new task, but the project can be executed within the mainstream company.
This is how Chrysler, Eli Lilly, and Medtronic accelerated their product
development cycles so dramatically. 11 Heavyweight teams are the
organizational mechanism that the managers of IBM’s disk drive division used
to learn how to integrate components more effectively in their product designs,
in order to wring 50 percent higher performance out of the components they
used. Microsoft’s project to develop and launch its Internet browser was located
in the Region A corner of this framework. It represented an extraordinary,
difficult managerial achievement that required different people to work together
in patterns different than any ever used before within Microsoft. But it was a
sustaining technology to the company. Its customers wanted the product, and it
strengthened the company’s integral business model. There was, therefore, no
need to spin the project out into a completely different organization.
When in Region B, where the project fits the company’s processes and
values, a lightweight development team can be successful. In such teams
coordination across functional boundaries occurs within the mainstream
organization.
Region C denotes an area in which a manager is faced with a disruptive
technological change that doesn’t fit the organization’s existing processes and
values. To ensure success in such instances, managers should create an
autonomous organization and commission a heavyweight development team to
tackle the challenge. In addition to the examples cited in chapters 5, 6, and 7,
many companies’ efforts to address the distribution channel conflicts created by
the Internet should be managed in this manner. In 1999 Compaq Computer, for
example, launched a business to market its computers direct to customers over
the Internet, so that it could compete more effectively with Dell Computer.
Within a few weeks its retailers had protested so loudly that Compaq had to back
away from the strategy. This was very disruptive to the values, or profit model,
of the company and its retailers. The only way it could manage this conflict
would be to launch the direct business through an independent company. It
might even need a different brand in order to manage the tension.
Some have suggested that Wal-Mart’s strategy of managing its on-line
retailing operation through an independent organization in Silicon Valley is
foolhardy, because the spin-out organization can’t leverage Wal-Mart’s
extraordinary logistics management processes and infrastructure. I believe the
spin-out was wise, however, based upon Figure 8.1. The on-line venture actually
needs very different logistics processes than those of its bricks-and-mortar
operations. Those operations transport goods by the truck-load. On-line retailers
need to pick individual items from inventory and ship small packages to diverse
locations. The venture is not only disruptive to Wal-Mart’s values, but it needs
to create its own logistics processes as well. It needed to be spun out separately.
Region D typifies projects in which products or services similar to those in
the mainstream need to be sold within a fundamentally lower overhead cost
business model. Wal-Mart’s Sam’s Clubs would fit in this region. These, in fact,
can leverage similar logistics management processes as the main company; but
budgeting, management, and P&L responsibility needs to be different.
Functional and lightweight teams are appropriate vehicles for exploiting
Functional and lightweight teams are appropriate vehicles for exploiting
established capabilities, whereas heavyweight teams are tools for creating new
ones. Spin-out organizations, similarly, are tools for forging new values.
Unfortunately, most companies employ a one-size-fits-all organizing strategy,
using lightweight teams for programs of every size and character. Among those
few firms that have accepted the “heavyweight gospel,” many have attempted to
organize all of their development teams in a heavyweight fashion. Ideally, each
company should tailor the team structure and organizational location to the
process and values required by each project.
In many ways, the disruptive technologies model is a theory of relativity,
because what is disruptive to one company might have a sustaining impact on
another. For example, Dell Computer began by selling computers over the
telephone. For Dell, the initiative to begin selling and accepting orders over the
Internet was a sustaining innovation. It helped it make more money in the way it
was already structured. For Compaq, Hewlett-Packard, and IBM, however,
marketing direct to customers over the Internet would have a powerfully
disruptive impact. The same is true in stock brokerage. For discount brokers
such as Ameritrade and Charles Schwab, which accepted most of their orders by
telephone, trading securities on-line simply helped them discount more costeffectively—and even offer enhanced service relative to their former
capabilities. For full-service firms with commissioned brokers such as Merrill
Lynch, however, on-line trading represents a powerful disruptive threat.
SUMMARY
Managers whose organizations are confronting change must first determine that
they have the resources required to succeed.
They then need to ask a separate question: does the
organization have the processes and values to succeed?
Asking this second question is not as instinctive for most
managers because the processes by which work is done
and the values by which employees make their decisions
have served them well. What I hope this framework adds
to managers’ thinking, however, is that the very
capabilities of their organizations also define their
disabilities. A little time spent soul-searching for honest
answers to this issue will pay off handsomely. Are the
processes by which work habitually gets done in
the organization appropriate for this new problem? And
will the values of the organization cause this initiative to
get high priority, or to languish?
If the answer to these questions is no, it’s okay. Understanding problems is
the most crucial step in solving them. Wishful thinking about this issue can set
teams charged with developing and implementing an innovation on a course
fraught with roadblocks, second-guessing, and frustration. The reasons why
innovation often seems to be so difficult for established firms is that they employ
highly capable people, and then set them to work within processes and values
that weren’t designed to facilitate success with the task at hand. Ensuring that
capable people are ensconced in capable organizations is a major management
responsibility in an age such as ours, when the ability to cope with accelerating
responsibility in an age such as ours, when the ability to cope with accelerating
change has become so critical.
NOTES
1. See C. K. Prahalad, and Gary Hamel, “The Core Competence of the
Corporation,” Harvard Business Review, 1990.
2. Many of these ideas emerged from wonderful, stimulating discussions with
doctoral students in the Business Policy seminar at the Harvard Business
School between 1993 and 1999. I wish to thank all of those students, but in
particular Don Sull, Tom Eisenmann, Tomoyoshi Noda, Michael Raynor,
Michael Roberto, Deborah Sole, Clark Gilbert, and Michael Overdorf for their
contributions to these ideas.
3. The most logical, comprehensive characterization of processes that we have
seen is in David Garvin, “The Processes of Organization and Management,”
Sloan Management Review, Summer, 1998. When we use the term
“processes,” we mean for it to include all of the types of processes that Garvin
has defined.
4. See Dorothy Leonard-Barton, “Core Capabilities and Core Rigidities: A
Paradox in Managing New Product Development,” Strategic Management
Journal (13), 1992, 111–12
5. Professor Leonardi’s work on this topic, in my opinion, constitutes the
fundamental paradigm upon which much subsequent research is being built. 5.
See Wickham Skinner, “The Focused Factory,” Harvard Business Review,
1974.
6. See, for example, Thomas Peters and Robert Waterman, In Search of
Excellence (New York: Harper & Row Publishers, 1982).
7. See Edgar Schein, Organizational Culture and Leadership (San Francisco:
Jossey-Bass Publishers, 1988). This description of the development of an
organization’s culture draws heavily from Schein’s research.
8. See Nicole Tempest, “Cisco Systems, Inc. Post-Acquisition Manufacturing
Integration,” a teaching case published jointly by the Stanford University
Graduate School of Business and the Harvard Business School, 1998.
9. Steven C. Wheelwright and Kim B. Clark, Revolutionizing Product
Development (New York: The Free Press, 1992).
10. See Kim B. Clark and Steven C. Wheelwright, “Organizing and Leading
Heavyweight Development Teams,” California Management Review (34),
Spring, 1992, 9–28. The concepts described in this article are extremely
important. We highly recommend that managers interested in these problems
study it thoughtfully. They define a heavyweight team as one in which team
members typically are dedicated and colocated. The charge of each team
member is not to represent their functional group on the team, but to act as a
general manager—to assume responsibility for the success of the entire
project, and to be actively involved in the decisions and work of members
who come from each functional area. As they work together to complete their
project, they will work out new ways of interacting, coordinating, and
decision-making that will come to comprise the new processes, or new
capabilities, that will be needed to succeed in the new enterprise on an
ongoing basis. These ways of getting work done then get institutionalized as
the new business or product line grows.
11. See Jeff Dyer, “How Chrysler Created an American Keiretsu,” Harvard
Business Review, July-August, 1996, 42–56; Clayton M. Christensen, “We’ve
Got Rhythm! Medtronic Corporation’s Cardiac Pacemaker Business,”
Harvard Business School, Case No. 698-004; and Steven C. Wheelwright,
“Eli Lilly: The Evista Project,” Harvard Business School, Case No. 699-016.
CHAPTER NINE
Performance Provided, Market Demand, and the
Product Life Cycle
The graphs in this book showing the intersecting technology and market
trajectories have proven useful in explaining how leading firms can stumble
from positions of industry leadership. In each of the several industries explored,
technologists were able to provide rates of performance improvement that have
exceeded the rates of performance improvement that the market has needed or
was able to absorb. Historically, when this performance oversupply occurs, it
creates an opportunity for a disruptive technology to emerge and subsequently to
invade established markets from below.
As it creates this threat or opportunity for a disruptive technology,
performance oversupply also triggers a fundamental change in the basis of
competition in the product’s market: The rank-ordering of the criteria by which
customers choose one product or service over another will change, signaling a
transition from one phase (variously defined by management theorists) to the
next of the product life cycle. In other words, the intersecting trajectories of
performance supplied and performance demanded are fundamental triggers
behind the phases in the product life cycle. Because of this, trajectory maps such
as those used in this book usefully characterize how an industry’s competitive
dynamics and its basis of competition are likely to change over time.
As with past chapters, this discussion begins with an analysis from the disk
drive industry of what can happen when the performance supplied exceeds the
market’s demands. After seeing the same phenomenon played out in the markets
for accounting software and for diabetes care products, the link between this
pattern and the phases of the product life cycle will be clear.
PERFORMANCE OVERSUPPLY AND CHANGING BASES OF
COMPETITION
The phenomenon of performance oversupply is charted in Figure 9.1, an extract
from Figure 1.7. It shows that by 1988, the capacity of the average 3.5-inch drive
had finally increased to equal the capacity demanded in the mainstream desktop
personal computer market, and that the capacity of the average 5.25-inch drive
had by that time surpassed what the mainstream desktop market demanded by
nearly 300 percent. At this point, for the first time since the desktop market
emerged, computer makers had a choice of drives to buy: The 5.25-and 3.5-inch
drives both provided perfectly adequate capacity.
What was the result? The desktop personal computer makers began switching
to 3.5-inch drives in droves. Figure 9.2 illustrates this, using a substitution curve
format in which the vertical axis measures the ratio of new-to old-technology
units sold. In 1985 this measure was .007, meaning that less than 1 percent
(.0069) of the desktop market had switched to the 3.5-inch format. By 1987, the
ratio had advanced 0.20, meaning that 16.7 percent of the units sold into this
market that year were 3.5-inch drives. By 1989, the measure was 1.5, that is,
only four years after the 3.5-inch product had appeared as a faint blip on the
radar screen of the market, it accounted for 60 percent of drive sales.
Why did the 3.5-inch drive so decisively conquer the desktop PC market? A
standard economic guess might be that the 3.5-inch format represented a more
cost-effective architecture: If there were no longer any meaningful
differentiation between two types of products (both had adequate capacity), price
competition would intensify. This was not the case here, however. Indeed,
computer makers had to pay, on average, 20 percent more per megabyte to use
3.5-inch drives, and yet they still flocked to the product. Moreover, computer
manufacturers opted for the costlier drive while facing fierce price competition
in their own product markets. Why?
Performance oversupply triggered a change in the basis of competition. Once
the demand for capacity was satiated, other attributes, whose performance had
not yet satisfied market demands, came to be more highly valued and to
constitute the dimensions along which drive makers sought to differentiate their
products. In concept, this meant that the most important attribute measured on
the vertical axis of figures such as 8.1 changed, and that new trajectories of
product performance, compared to market demands, took shape.
product performance, compared to market demands, took shape.
Figure 9.1 Intersecting Trajectories of Capacity Demanded versus Capacity
Supplied in Rigid Disk Drives
Source: Data are from various issues of Disk/Trend Report.
Figure 9.2 Substitution of 8-, 5.25-, and 3.5-Inch Drives of 30 to 100 MB
Source: Data are from various issues of Disk/Trend Report.
Specifically, in the desktop personal computer marketplace between 1986
and 1988, the smallness of the drive began to matter more than other features.
The smaller 3.5-inch drive allowed computer manufacturers to reduce the size,
or desktop footprint, of their machines. At IBM, for example, the large XT/AT
box gave way to the much smaller PS1/PS2 generation machines.
For a time, when the availability of small drives did not satisfy market
demands, desktop computer makers continued to pay a hefty premium for 3.5inch drives. In fact, using the hedonic regression analysis described in chapter 4,
the 1986 shadow price for a one-cubic-inch reduction in the volume of a disk
drive was $4.72. But once the computer makers had configured their new
generations of desktop machines to use the smaller drive, their demand for even
more smallness was satiated. As a result, the 1989 shadow price, or the price
premium accorded to smaller drives, diminished to $0.06 for a one-cubic-inch
reduction.
Generally, once the performance level demanded of a particular attribute has
Generally, once the performance level demanded of a particular attribute has
been achieved, customers indicate their satiation by being less willing to pay a
premium price for continued improvement in that attribute. Hence, performance
oversupply triggers a shift in the basis of competition, and the criteria used by
customers to choose one product over another changes to attributes for which
market demands are not yet satisfied.
Figure 9.3 summarizes what seems to have happened in the desktop PC
market: The attribute measured on the vertical axis repeatedly changed.
Performance oversupply in capacity triggered the first redefinition of the vertical
axis, from capacity to physical size. When performance on this new dimension
satisfied market needs, the definition of performance on the vertical axis
changed once more, to reflect demand for reliability. For a time, products
offering competitively superior shock resistance and mean time between failure
(MTBF) were accorded a significant price premium, compared to competitive
offerings. But as MTBF values approached one million hours, 1 the shadow price
accorded to an increment of one hundred hours MTBF approached zero,
suggesting performance oversupply on that dimension of product performance.
The subsequent and current phase is an intense price-based competition, with
gross margins tumbling below 12 percent in some instances.
WHEN DOES A PRODUCT BECOME A COMMODITY?
The process of commoditization of disk drives was defined by the interplay
between the trajectories of what the market demanded and what the technology
supplied. The 5.25-inch drive had become a price-driven commodity in the
desktop market by about 1988, when the 3.5-inch drive was still at a premium
price. The 5.25-inch drive, in addition, even though priced as a commodity in
desktop applications, was at the same time, relative to 8-inch drives, achieving
substantial price premiums in higher-tier markets. As described in chapter 4, this
explains the aggressive moves upmarket made by established companies.
A product becomes a commodity within a specific market segment when the
repeated changes in the basis of competition, as described above, completely
play themselves out, that is, when market needs on each attribute or dimension
of performance have been fully satisfied by more than one available product.
The performance oversupply framework may help consultants, managers, and
researchers to understand the frustrated comments they regularly hear from
salespeople beaten down in price negotiations with customers: “Those stupid
guys are just treating our product like it was a commodity. Can’t they see how
much better our product is than the competition’s?” It may, in fact, be the case
that the product offerings of competitors in a market continue to be differentiated
from each other. But differentiation loses its meaning when the features and
functionality have exceeded what the market demands.
Figure 9.3 Changes in the Basis of Competition in the Disk Drive Industry
PERFORMANCE OVERSUPPLY AND THE EVOLUTION OF
PRODUCT COMPETITION
The marketing literature provides numerous descriptions of the product life cycle
and of the ways in which the characteristics of products within given categories
evolve over time. 2 The findings in this book suggest that, for many of these
models, performance oversupply is an important factor driving the transition
from one phase of the cycle to the next.
Consider, for example, the product evolution model, called the buying
hierarchy by its creators, Windermere Associates of San Francisco, California,
which describes as typical the following four phases: functionality, reliability,
convenience, and price. Initially, when no available product satisfies the
functionality requirements the market, the basis of competition, or the criteria by
which product choice is made, tends to be product functionality. (Sometimes, as
in disk drives, a market may cycle through several different functionality
dimensions.) Once two or more products credibly satisfy the market’s demand
for functionality, however, customers can no longer base their choice of products
on functionality, but tend to choose a product and vendor based on reliability. As
long as market demand for reliability exceeds what vendors are able to provide,
customers choose products on this basis—and the most reliable vendors of the
most reliable products earn a premium for it.
But when two or more vendors improve to the point that they more than
satisfy the reliability demanded by the market, the basis of competition shifts to
convenience. Customers will prefer those products that are the most convenient
to use and those vendors that are most convenient to deal with. Again, as long as
the market demand for convenience exceeds what vendors are able to provide,
customers choose products on this basis and reward vendors with premium
prices for the convenience they offer. Finally, when multiple vendors offer a
package of convenient products and services that fully satisfies market demand,
the basis of competition shifts to price. The factor driving the transition from one
phase of the buying hierarchy to the next is performance oversupply.
Another useful conception of industry evolution, formulated by Geoffrey
Moore in his book Crossing the Chasm, 3 has a similar underlying logic, but
articulates the stages in terms of the user rather than the product. Moore suggests
that products are initially used by innovators and early adopters in an industry—
customers who base their choice solely on the product’s functionality. During
this phase the top-performing products command significant price premiums.
Moore observes that markets then expand dramatically after the demand for
functionality in the mainstream market has been met, and vendors begin to
address the need for reliability among what he terms early majority customers. A
third wave of growth occurs when product and vendor reliability issues have
been resolved, and the basis of innovation and competition shifts to convenience,
thus pulling in the late majority customers. Underlying Moore’s model is the
notion that technology can improve to the point that market demand for a given
dimension of performance can be satiated.
This evolving pattern in the basis of competition—from functionality, to
reliability and convenience, and finally to price—has been seen in many of the
markets so far discussed. In fact, a key characteristic of a disruptive technology
is that it heralds a change in the basis of competition.
OTHER CONSISTENT CHARACTERISTICS OF DISRUPTIVE
TECHNOLOGIES
Two additional important characteristics of disruptive technologies consistently
affect product life cycles and competitive dynamics: First, the attributes that
make disruptive products worthless in mainstream markets typically become
their strongest selling points in emerging markets; and second, disruptive
products tend to be simpler, cheaper, and more reliable and convenient than
established products. Managers must understand these characteristics to
effectively chart their own strategies for designing, building, and selling
disruptive products. Even though the specific market applications for disruptive
technologies cannot be known in advance, managers can bet on these two
regularities.
1. The Weaknesses of Disruptive Technologies Are Their Strengths
The relation between disruptive technologies and the basis of competition in an
industry is complex. In the interplay among performance oversupply, the product
life cycle, and the emergence of disruptive technologies, it is often the very
attributes that render disruptive technologies useless in mainstream markets that
constitute their value in new markets.
In general, companies that have succeeded in disruptive innovation initially
took the characteristics and capabilities of the technology for granted and sought
to find or create a new market that would value or accept those attributes. Thus,
Conner Peripherals created a market for small drives in portable computers,
where smallness was valued; J. C. Bamford and J. I. Case built a market for
excavators among residential contractors, where small buckets and tractor
mobility actually created value; and Nucor found a market that didn’t mind the
surface blemishes on its thin-slab-cast sheet steel.
The companies toppled by these disruptive technologies, in contrast, each
took the established market’s needs as given, and did not attempt to market the
technology until they felt it was good enough to be valued in the mainstream
market. Thus, Seagate’s marketers took the firm’s early 3.5-inch drives to IBM
for evaluation, rather than asking, “Where is the market that would actually
value a smaller, lower-capacity drive?” When Bucyrus Erie acquired its
Hydrohoe hydraulic excavator line in 1951, its managers apparently did not ask,
“Where is the market that actually wants a mobile excavator that can only dig
narrow trenches?” They assumed instead that the market needed the largest
possible bucket size and the longest possible reach; they jury-rigged the
Hydrohoe with cables, pulleys, clutches, and winches and attempted to sell it to
general excavation contractors. When U.S. Steel was evaluating continuous thinslab casting, they did not ask, “Where is the market for low-priced sheet steel
with poor surface appearance?” Rather, they took it for granted that the market
needed the highest-possible quality of surface finish and invested more capital in
a conventional caster. They applied to a disruptive innovation a way of thinking
appropriate to a sustaining technology.
In the instances studied in this book, established firms confronted with
disruptive technology typically viewed their primary development challenge as a
technological one: to improve the disruptive technology enough that it suits
known markets. In contrast, the firms that were most successful in
commercializing a disruptive technology were those framing their primary
development challenge as a marketing one: to build or find a market where
product competition occurred along dimensions that favored the disruptive
attributes of the product. 4
It is critical that managers confronting disruptive technology observe this
principle. If history is any guide, companies that keep disruptive technologies
bottled up in their labs, working to improve them until they suit mainstream
markets, will not be nearly as successful as firms that find markets that embrace
the attributes of disruptive technologies as they initially stand. These latter firms,
by creating a commercial base and then moving upmarket, will ultimately
address the mainstream market much more effectively than will firms that have
framed disruptive technology as a laboratory, rather than a marketing, challenge.
2. Disruptive Technologies Are Typically Simpler, Cheaper, and
More Reliable and Convenient than Established Technologies
When performance oversupply has occurred and a disruptive technology attacks
the underbelly of a mainstream market, the disruptive technology often succeeds
both because it satisfies the market’s need for functionality, in terms of the
buying hierarchy, and because it is simpler, cheaper, and more reliable and
convenient than mainstream products. Recall, for example, the attack of
hydraulic excavation technology into the mainstream sewer and general
excavation markets recounted in chapter 3. Once hydraulically powered
excavators had the strength to handle buckets of 2 to 4 cubic yards of earth
(surpassing the performance demanded in mainstream markets), contractors
rapidly switched to these products even though the cable-actuated machines
were capable of moving even more earth per scoop. Because both technologies
provided adequate bucket capacity for their needs, contractors opted for the
technology that was most reliable: hydraulics.
Because established companies are so prone to push for high-performance,
high-profit products and markets, they find it very difficult not to overload their
first disruptive products with features and functionality. Hewlett-Packard’s
experience in designing its 1.3-inch Kittyhawk disk drive teaches just this
lesson. Unable to design a product that was truly simple and cheap, Kittyhawk’s
champions pushed its capacity to the limits of technology and gave it levels of
shock resistance and power consumption that would make it competitive as a
sustaining product. When very
high volume applications for a cheap, simple, singlefunction, 10 MB drive began to emerge, HP’s product
was not disruptive enough to catch that wave. Apple
committed a similar error in stretching the functionality
of its Newton, instead of initially targeting simplicity and
reliability.
PERFORMANCE OVERSUPPLY IN THE ACCOUNTING
SOFTWARE MARKET
Intuit, the maker of financial management software, is known primarily for its
extraordinarily successful personal financial software package, Quicken.
Quicken dominates its market because it is easy and convenient. Its makers pride
themselves on the fact that the vast majority of Quicken customers simply buy
the program, boot it up on their computers, and begin using it without having to
read the instruction manual. Its developers made it so convenient to use, and
continue to make it simpler and more convenient, by watching how
customers use the product, not by listening to what they
or the “experts” say they need. By watching for small
hints of where the product might be difficult or confusing
to use, the developers direct their energies toward a
progressively simpler, more convenient product that
provides adequate, rather than superior, functionality.
5
Less well known is Intuit’s commanding 70 percent share of the North
American small business accounting software market.
6
Intuit captured that share as a late entrant when it
launched Quickbooks, a product based on three simple
insights. First, previously available small business
accounting packages had been created under the close
guidance of certified public accountants and required
users to have a basic knowledge of accounting (debits
and credits, assets and liabilities, and so on) and to make
every journal entry twice (thus providing an audit trail for
each transaction). Second, most existing packages offered
a comprehensive and sophisticated array of reports and
analyses, an array that grew ever more complicated and
specialized with each new release as developers sought to
differentiate their products
by offering greater functionality. And third, 85 percent of
all companies in the United States were too small to
employ an
accountant: The books were kept by the proprietors or by
family members, who had no need for or understanding
of most of the entries and reports available from
mainstream accounting software. They did not know
what an audit trail was, let alone sense a need to use one.
Scott Cook, Intuit’s founder, surmised that most of these small companies
were run by proprietors who relied more on their intuition
and direct knowledge of the business than on the
information contained in accounting reports. In other
words, Cook decided that the makers of accounting
software for small businesses had overshot the
functionality required by that market, thus creating an
opportunity for a disruptive software technology that
provided
adequate, not superior functionality and was simple and
more convenient to use. Intuit’s disruptive Quickbooks
changed the basis of product competition from
functionality to convenience and captured 70 percent of
its market within two years of its introduction.
7
In fact, by 1995 Quickbooks accounted for a larger
share of Intuit’s revenues than did Quicken.
The response of established makers of small business accounting software to
Intuit’s invasion, quite predictably, has been to move upmarket, continuing to
release packages loaded with greater functionality; these focus on specific
market subsegments, targeted at sophisticated users of information systems at
loftier tiers of the market. Of the three leading suppliers of small business
accounting software (each of which claimed about 30 percent of the market in
1992), one has disappeared and one is languishing. The third has introduced a
simplified product to counter the success of Quickbooks, but it has claimed only
a tiny portion of the market.
PERFORMANCE OVERSUPPLY IN THE PRODUCT LIFE
CYCLE OF INSULIN
Another case of performance oversupply and disruptive technology precipitating
a change in the basis of competition—and threatening a change in industry
leadership—is found in the worldwide insulin business. In 1922, four researchers
in Toronto first successfully extracted insulin from the pancreases of animals
and injected it, with miraculous results, into humans with diabetes. Because
insulin was extracted from the ground-up pancreases of cows and pigs,
improving the purity of insulin (measured in impure parts per million, or ppm)
constituted a critical trajectory of performance improvement. Impurities dropped
from 50,000 ppm in 1925 to 10,000 ppm in 1950 to 10 ppm in 1980, primarily as
the result of persistent investment and effort by the world’s leading insulin
manufacturer, Eli Lilly and Company.
Despite this improvement, animal insulins, which are slightly different from
human insulin, caused a fraction of a percent of diabetic patients to build up
resistance in their immune systems. Thus, in 1978, Eli Lilly contracted with
Genentech to create genetically altered bacteria that could produce insulin
proteins that were the structural equivalent of human insulin proteins and 100
percent pure. The project was technically successful, and in the early 1980s,
after a nearly $1 billion investment, Lilly introduced its Humulin-brand insulin
to the market. Priced at a 25 percent premium over insulins of animal extraction,
because of its human equivalence and its purity, Humulin was the first
commercial-scale product for human consumption to emerge from the
biotechnology industry.
The market’s response to this technological miracle, however, was tepid.
Lilly found it very difficult to sustain a premium price over animal insulin, and
the growth in the sales volume of Humulin was disappointingly slow. “In
retrospect,” noted a Lilly researcher, “the market was not terribly dissatisfied
with pork insulin. In fact, it was pretty happy with it.” 8 Lilly had spent
enormous capital and organizational energy overshooting the market’s demand
for product purity. Once again, this was a differentiated product to which the
market did not accord a price premium because the performance it provided
exceeded what the market demanded.
Meanwhile, Novo, a much smaller Danish insulin maker, was busy
developing a line of insulin pens, a more convenient way for taking insulin.
Conventionally, people with diabetes carried a separate syringe, inserted its
needle into one glass insulin vial, pulled its plunger out to draw slightly more
than the desired amount of insulin into the syringe, and held up the needle and
flicked the syringe several times to dislodge any air bubbles that clung to the
cylinder walls. They generally then had to repeat this process with a second,
slower acting type of insulin. Only after squeezing the plunger slightly to force
any remaining bubbles—and, inevitably, some insulin—out of the syringe could
they inject themselves with the insulin. This process typically took one to two
minutes.
Novo’s pen, in contrast, held a cartridge containing a couple of weeks’
supply of insulin, usually mixtures of both the fast-acting and the gradually
released types. People using the Novo pen simply had to turn a small dial to the
amount of insulin they needed to inject, poke the pen’s needle under the skin,
and press a button. The procedure took less than ten seconds. In contrast to
Lilly’s struggle to command a premium price for Humulin, Novo’s convenient
pens easily sustained a 30 percent price premium per unit of insulin. Through the
1980s, propelled largely by the success of its line of pens and pre-mixed
cartridges, Novo increased its share of the worldwide insulin market
substantially—and profitably. Lilly’s and Novo’s experiences offer further proof
that a product whose performance exceeds market demands suffers commoditylike pricing, while disruptive products that redefine the basis of competition
command a premium.
Teaching the Harvard Business School case to executives and MBA students
about Lilly overshooting the market demand for insulin purity has been one of
my most interesting professional experiences. In every class, the majority of
students quickly pounce on Lilly for having missed something so obvious—that
only a fraction of a percent of people with diabetes develop insulin resistance—
and that the differentiation between highly purified pork insulin at 10 ppm and
perfectly pure Humulin was not significant. Surely, they assert, a few simple
focus groups in which patients and doctors were asked whether they wanted
purer insulin would have given Lilly adequate guidance.
In every discussion, however, more thoughtful students soon begin to sway
class opinion toward the view that (as we have seen over and over) what is
obvious in retrospect might not be at all obvious in the thick of battle. Of all the
physicians to whom Lilly’s marketers listened, for example, which ones tended
to carry the most credibility? Endocrinologists whose practices focused on
diabetes care, the leading customers in this business. What sorts of patients are
diabetes care, the leading customers in this business. What sorts of patients are
most likely to consume the professional interests of these specialists? Those with
the most advanced and intractable problems, among which insulin resistance was
prominent. What, therefore, were these leading customers likely to tell Lilly’s
marketers when they asked what should be done to improve the next-generation
insulin product? Indeed, the power and influence of leading customers is a major
reason why companies’ product development trajectories overshoot the demands
of mainstream markets.
Furthermore, thoughtful students observe that it would not even occur to
most marketing managers to ask the question of whether a 100 percent pure
human insulin might exceed market needs. For more than fifty years in a very
successful company with a very strong culture, greater purity was the very
definition of a better product. Coming up with purer insulins had always been
the formula for staying ahead of the competition. Greater purity had always been
a catching story that the salesforce could use to attract the time and attention of
busy physicians. What in the company’s history would cause its culture-based
assumptions suddenly to change and its executives to begin asking questions that
never before had needed to be answered? 9
CONTROLLING THE EVOLUTION OF PRODUCT
COMPETITION
Figure 9.4 summarizes the model of performance oversupply, depicting a multitiered market in which the trajectory of performance improvement demanded by
the market is shallower than the trajectory of improvement supplied by
technologists. Hence, each tier of the market progresses through an evolutionary
cycle marked by a shifting basis for product choice. Although other terms for
product life cycles would yield similar results, this diagram uses the buying
hierarchy devised by Windermere Associates, in which competition centers first
on functionality, followed by reliability, convenience, and, finally, price. In each
of the cases reviewed in this chapter, the products heralding shifts in the basis of
competition and progression to the next product life cycle phase were disruptive
technologies.
Figure 9.4 Managing Changes in the Basis of Competition
The figure shows the strategic alternatives available to companies facing
performance oversupply and the consequent likelihood that disruptive
approaches will change the nature of competition in their industry. The first
general option, labeled strategy 1 and the one most commonly pursued in the
industries explored in this book, is to ascend the trajectory of sustaining
technologies into ever-higher tiers of the market, ultimately abandoning lowertier customers when simpler, more convenient, or less costly disruptive
approaches emerge.
A second alternative, labeled strategy 2, is to march in lock-step with the
needs of customers in a given tier of the market, catching successive waves of
change in the basis of competition. Historically, this appears to have been
difficult to do, for all of the reasons described in earlier chapters. In the personal
computer industry, for example, as the functionality of desktop machines came
to satiate the demands of the lower tiers of the market, new entrants such as Dell
and Gateway 2000 entered with value propositions centered on convenience of
purchase and use. In the face of this, Compaq responded by actively pursuing
this second approach, aggressively fighting any upmarket drift by producing a
line of computers with low prices and modest functionality targeted to the needs
line of computers with low prices and modest functionality targeted to the needs
of the lower tiers of the market.
The third strategic option for dealing with these dynamics is to use marketing
initiatives to steepen the slopes of the market trajectories so that customers
demand the performance improvements that the technologists provide. Since a
necessary condition for the playing out of these dynamics is that the slope of the
technology trajectory be steeper than the market’s trajectory, when the two
slopes are parallel, performance oversupply—and the progression from one stage
of the product life cycle to the next—does not occur or is at least postponed.
Some computer industry observers believe that Microsoft, Intel, and the disk
drive companies have pursued this last strategy very effectively. Microsoft has
used its industry dominance to create and successfully market software packages
that consume massive amounts of disk memory and require ever-faster
microprocessors to execute. It has, essentially, increased the slopes of the
trajectories of improvement in functionality demanded by their customers to
parallel the slope of improvement provided by their technologists. The effect of
this strategy is described in Figure 9.5, depicting recent events in the disk drive
industry. (This chart updates through 1996 the disk drive trajectory map in
Figure 1.7.) Notice how the trajectories of capacity demanded in the mid-range,
desktop, and notebook computer segments kinked upward in the 1990s along a
path that essentially paralleled the capacity path blazed by the makers of 3.5inch and 2.5-inch disk drives. Because of this, these markets have not
experienced performance oversupply in recent years. The 2.5-inch drive remains
locked within the notebook computer market because capacity demanded on the
desktop is increasing at too brisk a pace. The 3.5-inch drive remains solidly
ensconced in the desktop market, and the 1.8-inch drive has penetrated few
notebook computers, for the same reasons. In this situation, the companies
whose products are positioned closest to the top of the market, such as Seagate
and IBM, have been the most profitable, because in the absence of technology
oversupply, a shift in the stages of the product life cycle at the high end of the
market has been held at bay.
Figure 9.5 Changed Performance Demand Trajectories and the Deferred Impact
of Disruptive Technologies
Source: An earlier version of this figure was published in Clayton M.
Christensen, “The Rigid Disk Drive Industry: A History of Commercial and
Technological Turbulence,” Business History Review 67, no. 4 (Winter 1993):
559.
It is unclear how long the marketers at Microsoft, Intel, and Seagate can
succeed in creating demand for whatever functionality their technologists can
supply. Microsoft’s Excel spreadsheet software, for example, required 1.2 MB of
disk storage capacity in its version 1.2, released in 1987. Its version 5.0, released
in 1995, required 32 MB of disk storage capacity. Some industry observers
believe that if a team of developers were to watch typical users, they would find
that functionality has substantially overshot mainstream market demands. If true,
this could create an opportunity for a disruptive technology—applets picked off
the internet and used in simple internet appliances rather than in full-function
computers, for example—to invade this market from below.
RIGHT AND WRONG STRATEGIES
Which of the strategies illustrated in Figure 9.4 is best? This study finds clear
evidence that there is no one best strategy.
Any of the three, consciously pursued, can be successful.
Hewlett-Packard’s pursuit of the first strategy in its laser
jet printer business has been enormously profitable. In
this instance, it has been a safe strategy as well, because
HP is attacking its own position with disruptive ink-jet
technology. Compaq Computer and the trinity of Intel,
Microsoft, and the disk drive makers have successfully—
at least to date—implemented the second and third
strategies, respectively.
These successful practitioners have in common their apparent understanding
—whether explicit or intuitive—of both their customers’
trajectories of need and their own technologists’
trajectories of supply. Understanding these trajectories is
the key to their success thus far. But
the list of firms that have consistently done this is
disturbingly short. Most well-run companies migrate
unconsciously to the northeast, setting themselves up to
be caught by a change in the basis of competition and an
attack from below by disruptive technology.
NOTES
1. In disk drive industry convention, a mean time between failure measure of one
million hours means that if one million disk drives were turned on
simultaneously and operated continuously for one hour, one of those drives
would fail within the first hour.
2. Three of the earliest and most influential papers that proposed the existence of
product life cycles were Jay W. Forrester, “Industrial Dynamics,” Harvard
Business Review, July–August, 1958, 9–14; Arch Patton, “Stretch Your
Products’ Earning Years—Top Management’s Stake in the Product Life
Cycle,” Management Review (38), June, 1959, 67–79; and William E. Cox,
“Product Life Cycles as Marketing Models,” Journal of Business (40),
October, 1967, 375. Papers summarizing the conceptual and empirical
problems surrounding the product life cycle concept include Nariman K.
Dhalla and Sonia Yuspeh, “Forget the Product Life Cycle Concept!” Harvard
Business Review, January–February, 1976, 102–112; David R. Rink and John
E. Swan, “Product Life Cycle Research: A Literature Review,” Journal of
Business Research, 1979, 219; and George S. Day, “The Product Life Cycle:
Analysis and Applications Issues,” Journal of Marketing (45), Fall, 1981, 60–
67. A paper by Gerard J. Tellis and C. Merle Crawford, “An Evolutionary
Approach to Product Growth Theory,” Journal of Marketing (45), Fall, 1981,
125–132, contains a cogent critique of the product life cycle concept, and
presents a theory of product evolution that presages many of the ideas
presented in this section.
3. Geoffrey A. Moore, Crossing the Chasm (New York: HarperBusiness, 1991).
4. The same behavior characterized the emergence of portable radios. In the
early 1950s, Akio Morita, the chairman of Sony, took up residence in an
inexpensive New York City hotel in order to negotiate a license to AT&T’s
patented transistor technology, which its scientists had invented in 1947.
Morita found AT&T to be a less-than-willing negotiator and had to visit the
company repeatedly badgering AT&T to grant the license. Finally AT&T
relented. After the meeting ended in which the licensing documents were
signed, an AT&T official asked Morita what Sony planned to do with the
license. “We will build small radios,” Morita replied. “Why would anyone
care about smaller radios?” the official queried. “We’ll see,” was Morita’s
answer. Several months later Sony introduced to the U.S. market the first
portable transistor radio. According to the dominant metrics of radio
performance in the mainstream market, these early transistor radios were
really bad, offering far lower fidelity and much more static than the vacuum
tube–based tabletop radios that were the dominant design of the time. But
rather than work in his labs until his transistor radios were performancecompetitive in the major market (which is what most of the leading electronics
companies did with transistor technology), Morita instead found a market that
valued the attributes of the technology as it existed at the time—the portable
personal radio. Not surprisingly, none of the leading makers of tabletop radios
became a leading producer of portable radios, and all were subsequently
driven from the radio market. (This story was recounted to me by Dr. Sheldon
Weinig, retired vice chairman for manufacturing and technology of Sony
Corporation.)
5. John Case, “Customer Service: The Last Word,” Inc. Magazine, April, 1991,
1–5.
6. This information in this section was given to the author by Scott Cook, the
founder and chairman of Intuit Corporation, and by Jay O’Connor, marketing
manager for Quickbooks.
7. Cook recounts that in the process of designing a simple and convenient
accounting software package, Intuit’s developers arrived at a profound insight.
The double-entry accounting system originally developed by Venetian
merchants to catch arithmetical mistakes continued to be used in every
available package of accounting software—even though computers typically
do not make mistakes in addition and subtraction. Intuit was able to greatly
simplify its product by eliminating this unneeded dimension of product
functionality.
8. See “Eli Lilly & Co.: Innovation in Diabetes Care,” Harvard Business School,
Case No. 9-696-077. This case notes that although Lilly was not able to
achieve premium pricing for its Humulin insulin, it benefited from the
investment. Humulin protected Lilly against a possible shortfall in the
pancreas supply, threatened by declining red meat consumption, and it gave
Lilly a very valuable experience and asset base in the volume manufacturing
of bioengineered drugs.
9. Once such minority opinions have been raised in class, many students then
begin to see that institutions widely regarded as among the best-managed and
most successful in the world may have overshot what their mainstream
markets demand. Intel, for example, has always measured the speed of its
microprocessors on the vertical axis of its performance graphs. It has always
assumed that the market demands ever-faster microprocessors, and evidence
to the tune of billions of dollars in profit has certainly confirmed that belief.
Certainly some leading-edge customers need chips that process instructions at
rates of 200, 400, and 800 MHz. But what about the mainstream market? Is it
possible that sometime soon the speed and cost of Intel’s new microprocessors
might overshoot market demands? And if technology oversupply is possible,
how will thousands of Intel employees be able to recognize when this has
occurred, accepting the change with enough conviction to completely alter the
trajectory of their development efforts? Discerning technology oversupply is
difficult. Doing something about it is even more so.
CHAPTER TEN
Managing Disruptive Technological Change: A
Case Study
As we approach the end of this book, we should better understand why
great companies can stumble. Incompetence, bureaucracy, arrogance, tired
executive blood, poor planning, and short-term investment horizons obviously
have played leading roles in toppling many companies. But we have learned here
that even the best managers are subject to certain laws that make disruptive
innovation difficult. It is when great managers haven’t understood or have
attempted to fight these forces that their companies have stumbled.
This chapter uses the forces and principles described in earlier chapters to
illustrate how managers can succeed when faced with disruptive technology
change. To do so, I employ a case study format, using a personal voice, to
suggest how I, as a hypothetical employee of a major automaker, might manage
a program to develop and commercialize one of the most vexing innovations of
our day: the electric vehicle. My purpose here is explicitly not to offer any socalled right answer to this particular challenge, nor to predict whether or how
electric vehicles may become commercially successful. Rather, it is to suggest in
a familiar but challenging context how managers might structure their thinking
about a similar problem by proposing a sequence of questions that, if asked, can
lead to a sound and useful answer.
HOW CAN WE KNOW IF A TECHNOLOGY IS DISRUPTIVE?
Electric-powered vehicles have hovered at the fringe of legitimacy since the
early 1900s, when they lost the contest for the dominant vehicle design to
gasoline power. Research on these vehicles accelerated during the 1970s,
however, as policy makers increasingly looked to them as a way to reduce urban
air pollution. The California Air Resources Board (CARB) forced an
unprecedented infusion of resources into the effort in the early 1990s when it
mandated that, starting in 1998, no automobile manufacturer would be allowed
to sell any cars in California if electric vehicles did not constitute at least 2
percent of its unit sales in the state. 1
In my hypothetical responsibility for managing an automaker’s program, my
first step would be to ask a series of questions: How much do we need to worry
about electric cars? That is, aside from California’s mandate, does the electric
car pose a legitimate disruptive threat to companies making gasoline-powered
automobiles? Does it constitute an opportunity for profitable growth?
To answer these questions, I would graph the trajectories of performance
improvement demanded in the market versus the performance improvement
supplied by the technology; in other words, I would create for electric vehicles a
trajectory map similar to those in Figures 1.7 or 9.5. Such charts are the best
method I know for identifying disruptive technologies.
The first step in making this chart involves defining current mainstream
market needs and comparing them with the current capacity of electric vehicles.
To measure market needs, I would watch carefully what customers do, not
simply listen to what they say. Watching how customers actually use a product
provides much more reliable information than can be gleaned from a verbal
interview or a focus group. 2 Thus, observations indicate that auto users today
require a minimum cruising range (that is, the distance that can be driven
without refueling) of about 125 to 150 miles; most electric vehicles only offer a
minimum cruising range of 50 to 80 miles. Similarly, drivers seem to require
cars that accelerate from 0 to 60 miles per hour in less than 10 seconds
(necessary primarily to merge safely into high-speed traffic from freeway
entrance ramps); most electric vehicles take nearly 20 seconds to get there. And,
finally, buyers in the mainstream market demand a wide array of options, but it
would be impossible for electric vehicle manufacturers to offer a similar variety
within the small initial unit volumes that will characterize that business. 3
According to almost any definition of functionality used for the vertical axis of
our proposed chart, the electric vehicle will be deficient compared to a gasolinepowered car.
This information is not sufficient to characterize electric vehicles as
disruptive, however. They will only be disruptive if we find that they are also on
a trajectory of improvement that might someday make them competitive in parts
of the mainstream market. To assess this possibility, we need to project
trajectories measuring the performance improvement demanded in the market
versus the performance improvement that electric vehicle technology may
provide. If these trajectories are parallel, then electric vehicles are unlikely to
become factors in the mainstream market; but if the technology will progress
faster than the pace of improvement demanded in the market, then the threat of
disruption is real.
Figure 10.1 shows that the trajectories of performance improvement
demanded in the market—whether measured in terms of required acceleration,
cruising range, or top cruising speed—are relatively flat. This is because traffic
laws impose a limit on the usefulness of ever-more-powerful cars, and
demographic, economic, and geographic considerations limit the increase in
commuting miles for the average driver to less than 1 percent per year. 4 At the
same time, the performance of electric vehicles is improving at a faster rate—
between 2 and 4 percent per year— suggesting that sustaining technological
advances might indeed carry electric vehicles from their position today, where
they cannot compete in mainstream markets, to a position in the future where
they might. 5
In other words, as an automotive company executive, I would worry about
the electric vehicle, not just because it is politically correct to be investing in
environmentally friendly technologies, but because electric vehicles have the
smell of a disruptive technology. They can’t be used in mainstream markets;
they offer a set of attributes that is orthogonal to those that command attention in
the gasoline-powered value network; and the technology is moving ahead at a
faster rate than the market’s trajectory of need.
Because electric vehicles are not sustaining innovations, however,
mainstream automakers naturally doubt that there is a market for them— another
symptom of a disruptive innovation. Consider this statement by the director of
Ford’s electric vehicle program: “The electric Ranger will sell at approximately
$30,000 and have a lead-acid battery that will give it a range of 50 miles …. The
1998 electric vehicle will be a difficult sell. The products that will be available
will not meet customer expectations in terms of range, cost or utility.” 6 Indeed,
given their present performance along these parameters, it will be about as easy
to sell electric vehicles into the mainstream car market as it was to sell 5.25-inch
disk drives to mainframe computer makers in 1980.
Figure 10.1 The Electric Car
Source: Data are from Dr. Paul J. Miller, Senior Energy Fellow, W. Alton Jones
Foundation and from numerous articles about electric vehicles.
In evaluating these trajectories, I would be careful to keep asking the right
question: Will the trajectory of electric vehicle performance ever intersect the
trajectory of market demands (as revealed in the way customers use cars)?
Industry experts may contend that electric vehicles will never perform as well as
gasoline-powered cars, in effect comparing the trajectories of the two
technologies. They are probably correct. But, recalling the experience of their
counterparts in the disk drive industry, they will have the right answer to the
wrong question. I also would note, but not be deterred by, the mountain of expert
opinion averring that without a major technological breakthrough in battery
technology, there will never be a substantial market for electric vehicles. The
reason? If electric vehicles are viewed as a sustaining technology for established
market value networks, they are clearly right. But because the track records of
experts predicting the nature and size of markets for disruptive technologies is
very poor, I would be particularly skeptical of the experts’ skepticism, even as I
remain uncertain about my own conclusions.
WHERE IS THE MARKET FOR ELECTRIC VEHICLES?
Having decided that electric vehicles are a potentially disruptive technology, my
next challenge would be to define a marketing strategy that could lead my
company to a legitimate, unsubsidized market in which electric cars might first
be used. In formulating this marketing strategy, I would apply three findings
from earlier chapters in this book.
First, I would acknowledge that, by definition, electric vehicles cannot
initially be used in mainstream applications because they do not satisfy the basic
performance requirements of that market. I would therefore be sure that
everybody having anything to do with my program understands this point:
Although we don’t have a clue about where the market is, the one thing we know
for certain is that it isn’t in an established automobile market segment.
Ironically, I would expect most automakers to focus precisely and myopically on
the mainstream market because of the principle of resource dependence and the
principle that small markets don’t solve the growth and profit needs of big
companies. I would not, therefore, follow the lead of other automakers in my
search for customers, because I would recognize that their instincts and
capabilities are likely to be trained on the wrong target. 7
Nonetheless, my task is to find a market in which the vehicles can be used,
because the early entrants into disruptive technology markets develop
capabilities that constitute strong advantages over later entrants. They’re the
ones that, from a profitable business base in this beachhead market, will most
successfully throw impetus behind the sustaining innovations required to move
the disruptive technology upmarket, toward the mainstream. Holding back from
the market, waiting for laboratory researchers to develop a breakthrough battery
technology, for example, is the path of least resistance for managers. But this
strategy has rarely proven to be a viable route to success with a disruptive
innovation.
Historically, as we have seen, the very attributes that make disruptive
technologies uncompetitive in mainstream markets actually count as positive
attributes in their emerging value network. In disk drives, the smallness of 5.25inch models made them unusable in large computers but very useful on the
desktop. While the small bucket capacity and short reach of early hydraulic
excavators made them useless in general excavation, their ability to dig precise,
narrow trenches made them useful in residential construction. Odd as it sounds,
therefore, I would direct my marketers to focus on uncovering somewhere a
group of buyers who have an undiscovered need for a vehicle that accelerates
relatively slowly and can’t be driven farther than 100 miles!
The second point on which I would base my marketing approach is that no
one can learn from market research what the early market(s) for electric
vehicles will be. I can hire consultants, but the only thing I can know for sure is
that their findings will be wrong. Nor can customers tell me whether or how they
might use electric vehicles, because they will discover how they might use the
products at the same time as we discover it—just as Honda’s Supercub opened
an unforeseen new application for motorbiking. The only useful information
about the market will be what I create through expeditions into the market,
through testing and probing, trial and error, by selling real products to real
people who pay real money. 8 Government mandates, incidentally, are likely to
distort rather than solve the problem of finding a market. I would, therefore,
force my organization to live by its wits rather than to rely on capricious
subsidies or noneconomic–based California regulation to fuel my business.
The third point is that my business plan must be a plan for learning, not one
for executing a preconceived strategy. Although I will do my best to hit the right
market with the right product and the right strategy the first time out, there is a
high probability that a better direction will emerge as the business heads toward
its initial target. I must therefore plan to be wrong and to learn what is right as
fast as possible. 9 I cannot spend all of my resources or all of my organizational
credibility on an all-or-nothing first-time bet, as Apple did with its Newton or
Hewlett-Packard did with its Kittyhawk. I need to conserve resources to get it
right on the second or third try.
These three concepts would constitute the foundation of my marketing
strategy.
Potential Markets: Some Speculation
What might emerge as the initial value network for electric vehicles? Again,
though it is impossible to predict, it almost surely will be one in which the
weaknesses of the electric vehicle will be seen as strengths. One of my students
has suggested that the parents of high school students, who buy their children
cars for basic transportation to and from school, friends’ homes, and school
events, might constitute a fertile market for electric vehicles. 10 Given the option,
these parents might see the product simplicity, slow acceleration, and limited
driving range of electric vehicles as very desirable attributes for their teenagers’
cars—especially if they were styled with teenagers in mind. Given the right
marketing approach, who knows what might happen? An earlier generation met
a lot of nice people on their Hondas.
Another possible early market might be taxis or small-parcel delivery
vehicles destined for the growing, crowded, noisy, polluted cities of Southeast
Asia. Vehicles can sit on Bangkok’s roads all day, mostly idling in traffic jams
and never accelerating above 30 miles per hour. Electric motors would not need
to run and hence would not drain the battery while idling. The maneuverability
and ease of parking of these small vehicles would be additional attractions.
These or similar market ideas, whether or not they ultimately prove viable,
are at least consistent with the way disruptive technologies develop and emerge.
How Are Today’s Automobile Companies Marketing Electric
Vehicles?
The strategy proposed here for finding and defining the initial market for electric
vehicles stands in stark contrast to the marketing approaches being used by
today’s major automakers, each of which is struggling to sell electric vehicles
into its mainstream market in the time-honored tradition of established firms
mishandling disruptive technologies. Consider this statement made in 1995 by
William Glaub, Chrysler general sales manager, discussing his company’s
planned offering for 1998. 11
Chrysler Corporation is preparing to provide an electric powered version
of our slick new minivan in time for the 1998 model year. After an indepth study of the option between a purpose-built vehicle and
modification of an existing platform, the choice of the minivan to use as
an electric powered platform, in retrospect, is an obvious best choice for
us. Our experience shows that fleets will likely be the best opportunity to
move any number of these vehicles …. The problem that we face is not in
creating an attractive package. The new minivan is an attractive package.
The problem is that sufficient energy storage capacity is not available on
board the vehicle. 12
To position its offering in the mainstream market, Chrysler has had to pack
its minivan with 1,600 pounds of batteries. This, of course, makes its
acceleration much slower, its driving range shorter, and its braking distance
longer than other available gasoline-powered automobiles. Because of the way
Chrysler has positioned its electric vehicle, industry analysts naturally compare
it to gasoline-powered minivans, using the metrics paramount in the mainstream
value network. At an estimated cost of $100,000 (compared with $22,000 for the
gasoline-powered model), nobody in their right mind would consider buying
Chrysler’s product.
Chrysler’s marketers are, naturally enough, very pessimistic about their
ability to sell any electric minivans in California, despite the government’s
mandate that they do so. William Glaub, for example, continued the remarks
cited above with the following observation:
Markets are developed with fine products that customers desire to own.
No salesman can take marginal product into the marketplace and have any
hope of establishing a sustainable consumer base. Consumers will not be
forced into a purchase that they do not want. Mandates will not work in a
consumer-driven, free market economy. For electric vehicles to find a
place in the market, respectable products comparable to today’s gasolinepowered cars must be available. 13
Chrysler’s conclusion is absolutely correct, given the way its marketers have
framed their challenge. 14 Mainstream customers can never use a disruptive
technology at its outset.
WHAT SHOULD BE OUR PRODUCT, TECHNOLOGY, AND
DISTRIBUTION STRATEGIES?
Product Development for Disruptive Innovations
Guiding my engineers in designing our initial electric vehicle will be a
challenge, because of the classic chicken-and-egg problem: Without a market,
there is no obvious or reliable source of customer input; without a product that
addresses customers’ needs, there can be no market. How can we design a
product in such a vacuum? Fortunately, the principles described in this book
give us some help.
The most valuable guidance comes from chapter 9, which indicated that the
basis of competition will change over a product’s life cycle and that the cycle of
evolution itself is driven by the phenomenon of performance oversupply, that is,
the condition in which the performance provided by a technology exceeds the
actual needs of the market. Historically, performance oversupply opens the door
for simpler, less expensive, and more convenient—and almost always disruptive
—technologies to enter.
Performance oversupply indeed seems to have occurred in autos. There are
practical limits to the size of auto bodies and engines, to the value of going from
0 to 60 in fewer seconds, and to the consumer’s ability to cope with overchoice
in available options. Thus, we can safely predict that the basis of product
competition and customer choice will shift away from these measures of
functionality toward other attributes, such as reliability and convenience. This is
borne out by the nature of the most successful entrants into the North American
market during the past thirty years; they have succeeded not because they
introduced products with superior functionality, but because they competed on
the basis of reliability and convenience.
Toyota, for example, entered the U.S. market with its simple, reliable
Corona, establishing a low-end market position. Then, consistent with the
inexorable attraction to migrate upmarket, Toyota introduced models, such as
Camry, Previa, and Lexus, with added features and functionality, creating a
vacuum at the low end of the market into which entrants such as Saturn and
Hyundai have entered. Saturn’s strategy has been to characterize the customer’s
entire experience of buying and owning the vehicle as reliable and convenient,
but it, too, judging by recent reports, 15 will soon take its turn moving upmarket,
creating a new vacuum at the low end for even simpler, more convenient
transportation.
In all likelihood, therefore, the winning design in the first stages of the
electric vehicle race will be characterized by simplicity and convenience and will
be incubated in an emerging value network in which these attributes are
important measures of value. Each of the disruptive technologies studied in this
book has been smaller, simpler, and more convenient than preceding products.
Each was initially used in a new value network in which simplicity and
convenience were valued. This was true for smaller, simpler disk drives; desktop
and portable computers; hydraulic backhoes; steel minimills as opposed to
integrated mills; insulin-injecting pens as opposed to syringes. 16
Using these qualities as my guiding principles, I would instruct my design
engineers to proceed according to the following three criteria.
First, this vehicle must be simple, reliable, and convenient. That probably
means, for example, that figuring out a way to recharge its batteries quickly,
using the commonly available electrical service, would be an immutable
technological objective.
Second, because no one knows the ultimate market for the product or how it
will ultimately be used, we must design a product platform in which feature,
function, and styling changes can be made quickly and at low cost. Assuming,
for example, that the initial customers for electric vehicles will be parents who
buy them for their teenaged children to drive to and from school, friends’ homes,
and activities, the first model would have features and styling appropriate and
appealing to teenagers. But, although we may target this market first, there’s a
high probability that our initial concept will prove wrong. So we’ve got to get
the first models done fast and on a shoestring—leaving ample budget to get it
right once feedback from the market starts coming in. 17
Third, we must hit a low price point. Disruptive technologies typically have a
lower sticker price per unit than products that are used in the mainstream, even
though their cost in use is often higher. What enabled the use of disk drives in
desktop computers was not just their smaller size; it was their low unit price,
which fit within the overall price points that personal computer makers needed to
hit. The price per megabyte of the smaller disk drives was always higher than for
the larger drives. Similarly, in excavators the price per excavator was lower for
the early hydraulic models than for the established cable-actuated ones, but their
total cost per cubic yard of earth moved per hour was much higher. Accordingly,
our electric vehicle must have a lower sticker price than the prevailing price for
gasoline-powered cars, even if the operating cost per mile driven is higher.
Customers have a long track record of paying price premiums for convenience.
Technology Strategy for Disruptive Innovations
Our technology plan cannot call for any technological breakthroughs on the path
critical for the project’s success. Historically, disruptive technologies involve no
new technologies; rather, they consist of components built around proven
technologies and put together in a novel product architecture that offers the
customer a set of attributes never before available.
The major automakers engaged in electric vehicle development today all
maintain that a breakthrough in battery technology is absolutely essential before
electric vehicles can be commercially viable. John R. Wallace, of Ford, for
example, has stated the following:
The dilemma is that today’s batteries cannot satisfy these consumer needs.
As anybody who is familiar with today’s battery technology will tell you,
electric vehicles are not ready for prime time. All of the batteries expected
to be available in 1998 fall short of the 100-mile range [required by
consumers]. The only solution for the problems of range and cost is
improved battery technology. To ensure a commercially successful
electric vehicle market, the focus of our resources should be on the
development of battery technology. Industry efforts such as those through
the U.S. Advanced Battery consortium, along with cooperative efforts
among all electric vehicle stakeholders—such as utilities, battery
companies, environmentalists, regulators and converters— are the most
effective way to ensure the marketability of electric vehicles. 18
William Glaub, of Chrysler, takes a similar position: “The advanced lead-acid
batteries that will be used will provide less than the fuel storage equivalent of
two gallons of gasoline. This is like leaving home every day with the ‘low fuel’
light on. In other words, the battery technology is simply not ready.” 19
The reason these companies view a breakthrough in battery technology as the
critical bottleneck to the commercial success of electric vehicles, of course, is
that their executives have positioned their minds and their products in the
mainstream market. For Chrysler, this means an electric minivan; for Ford, an
electric Ranger. Given this position, they must deliver a sustaining technological
impact from what is inherently a disruptive technology. They need a
breakthrough in battery technology because they made the choice to somehow
position electric vehicles as a sustaining technology. A battery breakthrough is
not likely to be required of companies whose executives choose to harness or
account for the basic laws of disruptive technology by creating a market in
which the weaknesses of the electric vehicle become its strengths.
Where will advances in battery technology eventually come from? Looking
at the historical record, we can assert the following. The companies that
ultimately achieve the advances in battery technology required to power cars for
150-mile cruises (if they are ever developed) will be those that pioneer the
creation of a new value network using proven technology and then develop the
sustaining technologies needed to carry them upward into more attractive
markets. 20 Our finding that well-managed companies are generally upwardly
mobile and downwardly immobile, therefore, suggests that the impetus to find
the battery breakthrough will indeed be strongest among the disruptive
innovators, which will have built a lowend market for electric vehicles before
trying to move upmarket toward the larger, more profitable mainstream.
Distribution Strategy for Disruptive Innovations
It has almost always been the case that disruptive products redefine the dominant
distribution channels, because dealers’ economics—their models for how to
make money—are powerfully shaped by the mainstream value network, just as
the manufacturer’s are. Sony’s disruptive introduction of convenient and reliable
portable transistorized radios and televisions shifted the dominant retail channel
from appliance and department stores with expensive sales support and field
service networks (required for sets built with vacuum tubes) to volume-oriented,
low-overhead discount retailers. Honda’s disruptive motorbikes were rejected by
mainstream motorcycle dealers, forcing the company to create a new channel
among sporting goods retailers. We saw, in fact, that a major reason why HarleyDavidson’s small-bike initiative failed is that its dealers rejected it: The image
and economics of the small Italian bikes Harley had acquired did not fit its
dealer network.
The reason disruptive technologies and new distribution channels frequently
go hand-in-hand is, in fact, an economic one. Retailers and distributors tend to
have very clear formulas for making money, as the histories of Kresge and
Woolworth in chapter 4 showed. Some make money by selling low volumes of
big-ticket products at high margins; others make money by selling large volumes
at razor-thin margins that cover minimal operating overheads; still others make
their money servicing products already sold. Just as disruptive technologies
don’t fit the models of established firms for improving profits, they often don’t
fit the models of their distributors, either.
My electric vehicle program would, therefore, have as a basic strategic
premise the need to find or create new distribution channels for electric vehicles.
Unless proven otherwise, I’d bet that mainstream dealers of gasoline-powered
automobiles would not view the sorts of disruptive electric vehicles we have in
mind as critical to their success.
WHAT ORGANIZATION BEST SERVES DISRUPTIVE
INNOVATIONS?
After identifying the electric vehicle as a potentially disruptive technology;
setting realistic bearings for finding its potential markets; and establishing
strategic parameters for the product’s design, technology, and distribution
network, as program manager I would next turn to organization. Creating an
organizational context in which this effort can prosper will be crucial, because
rational resource allocation processes in established companies consistently deny
disruptive technologies the resources they need to survive, regardless of the
commitment senior management may ostensibly have made to the program.
Spinning Off an Independent Organization
As we saw in the discussion of resource dependence in chapter 5, established
firms that successfully built a strong market position in a disruptive technology
were those that spun off from the mainstream company an independent,
autonomously operated organization. Quantum, Control Data, IBM’s PC
Division, Allen Bradley, and Hewlett-Packard’s desk-jet initiative all succeeded
because they created organizations whose survival was predicated upon
successful commercialization of the disruptive technology: These firms
embedded a dedicated organization squarely within the emerging value network.
As program manager, therefore, I would strongly urge corporate management
to create an independent organization to commercialize electric vehicle
technology, either an autonomous business unit, such as GM’s Saturn Division
or the IBM PC Division, or an independent company whose stock is largely
owned by the corporation. In an independent organization, my best employees
would be able to focus on electric vehicles without being repeatedly withdrawn
from the project to solve pressing problems for customers who pay the present
bills. Demands from our own customers, on the other hand, would help us to
focus on and lend impetus and excitement to our program.
An independent organization would not only make resource dependence
work for us rather than against us, but it would also address the principle that
small markets cannot solve the growth or profit problems of large companies.
For many years into the future, the market for electric vehicles will be so small
that this business is unlikely to contribute significantly to the top or bottom lines
of a major automaker’s income statement. Thus, since senior managers at these
companies cannot be expected to focus either their priority attention or their
priority resources on electric vehicles, the most talented managers and engineers
would be unlikely to want to be associated with our project, which must
inevitably be seen as a financially insignificant effort: To secure their own
futures within the company, they naturally will want to work on mainstream
programs, not peripheral ones.
In the early years of this new business, orders are likely to be denominated in
hundreds, not tens of thousands. If we are lucky enough to get a few wins, they
almost surely will be small ones. In a small, independent organization, these
small wins will generate energy and enthusiasm. In the mainstream, they would
generate skepticism about whether we should even be in the business. I want my
organization’s customers to answer the question of whether we should be in the
business. I don’t want to spend my precious managerial energy constantly
defending our existence to efficiency analysts in the mainstream.
Innovations are fraught with difficulties and uncertainties. Because of this, I
want always to be sure that the projects that I manage are positioned directly on
the path everyone believes the organization must take to achieve higher growth
and greater profitability. If my program is widely viewed as being on that path,
then I have confidence that when the inevitable problems arise, somehow the
organization will work with me to muster whatever it takes to solve them and
succeed. If, on the other hand, my program is viewed by key people as
nonessential to the organization’s growth and profitability, or even worse, is
viewed as an idea that might erode profits, then even if the technology is simple,
the project will fail.
I can address this challenge in one of two ways: I could convince everyone in
the mainstream (in their heads and their guts) that the disruptive technology is
profitable, or I could create an organization that is small enough, with an
appropriate cost structure, that my program can be viewed as being on its critical
path to success. The latter alternative is a far more tractable management
challenge.
In a small, independent organization I will more likely be able to create an
appropriate attitude toward failure. Our initial stab into the market is not likely to
be successful. We will, therefore, need the flexibility to fail, but to fail on a
small scale, so that we can try again without having destroyed our credibility.
Again, there are two ways to create the proper tolerance toward failure: change
the values and culture of the mainstream organization or create a new
organization. The problem with asking the mainstream organization to be more
tolerant of risk-taking and failure is that, in general, we don’t want to tolerate
marketing failure when, as is most often the case, we are investing in sustaining
technology change. The mainstream organization is involved in taking sustaining
technological innovations into existing markets populated by known customers
with researchable needs. Getting it wrong the first time is not an intrinsic part of
these processes: Such innovations are amenable to careful planning and
coordinated execution.
Finally, I don’t want my organization to have pockets that are too deep.
While I don’t want my people to feel pressure to generate significant profit for
the mainstream company (this would force us into a fruitless search for an
instant large market), I want them to feel constant pressure to find some way
—some set of customers somewhere—to make our small organization cashpositive as fast as possible. We need a strong motivation to accelerate through
the trials and errors inherent in cultivating a new market.
Of course, the danger in making this unequivocal call for spinning out an
independent company is that some managers might apply this remedy
indiscriminately, viewing skunkworks and spinoffs as a blanket solution—an
industrial-strength aspirin that cures all sorts of problems. In reality, spinning out
is an appropriate step only when confronting disruptive innovation. The
evidence is very strong that large, mainstream organizations can be extremely
creative in developing and implementing sustaining innovations. 21 In other
words, the degree of disruptiveness inherent in an innovation provides a fairly
clear indication of when a mainstream organization might be capable of
succeeding with it and when it might be expected to fail.
In terms of the framework presented in Figure 5.6, the electric vehicle is not
only a disruptive innovation, but it involves massive architectural
reconfiguration as well, a reconfiguration that must occur not only within the
product itself but across the entire value chain. From procurement through
distribution, functional groups will have to interface differently than they have
ever before. Hence, my project would need to be managed as a heavyweight
team in an organization independent of the mainstream company. This
organizational structure cannot guarantee the success of our electric vehicle
program, but it would at least allow my team to work in an environment that
accounts for, rather than fights, the principles of disruptive innovation.
NOTES
1. In 1996, the state government delayed implementation of this requirement
until the year 2002, in response to motor vehicle manufacturers’ protests that,
given the performance and cost of the vehicles they had been able to design,
there was no demand for electric vehicles.
2. An excellent study on this subject is summarized in Dorothy Leonard-Barton,
Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995).
3. This information was taken from an October 1994 survey conducted by The
Dohring Company and quoted by the Toyota Motor Sales Company at the
CARB (California Air Resources Board) Workshop on Electric Vehicle
Consumer Marketability held in El Monte, California, on June 28, 1995.
4. This information was provided by Dr. Paul J. Miller, Senior Energy Fellow,
W. Alton Jones Foundation, Inc., Charlottesville, Virginia. It was augmented
with information from the following sources: Frank Keith, Paul Norton, and
Dana Sue Potestio, Electric Vehicles: Promise and Reality (California State
Legislative Report [19], No. 10, July, 1994); W. P. Egan, Electric Cars (Canberra, Australia: Bureau of Transport Economics, 1974); Daniel Sperling,
Future Drive: Electric Vehicles and Sustainable Transportation (Washington,
D.C.: Island Press, 1995); and William Hamilton, Electric Automobiles (New
York: McGraw Hill Company, 1980).
5. Based on the graphs in Figure 10.1, it will take a long time for disruptive
electric vehicle technology to become competitive in mainstream markets if
future rates of improvement resemble those of the past. The historical rate of
performance improvement is, of course, no guarantee that the future rate can
be maintained. Technologists very well might run into insurmountable
technological barriers. What we can say for sure, however, is that the
incentive of disruptive technologists to find some way to engineer around
such barriers will be just as strong as the disincentive that established car
makers will feel to move down-market. If present rates of improvement
continue, however, we would expect the cruising range of electric cars, for
example, to intersect with the average range demanded in the mainstream
market by 2015, and electric vehicle acceleration to intersect with mainstream
demands by 2020. Clearly, as will be discussed below, it will be crucial for
electric vehicle innovators to find markets that value the attributes of the
technology as it currently is capable, rather than waiting until the technology
improves to the point that it can be used in the mainstream market.
6. This statement was made by John R. Wallace, Director of Electric Vehicle
Programs, Ford Motor Company, at the CARB Workshop on Electric Vehicle
Consumer Marketability held at El Monte, California, on June 28, 1995.
7. It is remarkable how instinctively and consistently good companies try to
force innovations toward their existing base of customers, regardless of
whether they are sustaining or disruptive in character. We have seen this
several times in this book: for example, in mechanical excavators, where
Bucyrus Erie tried with its “Hydrohoe” to make hydraulic excavation
technology work for mainstream excavation contractors; in motorcycles,
where Harley-Davidson tried to launch low-end brand name bikes through its
dealer network; and in the electric vehicle case described here, in which
Chrysler packed nearly a ton of batteries into a minivan. Charles Ferguson and
Charles Morris, in their book Computer Wars, recount a similar story about
IBM’s efforts to commercialize Reduced Instruction Set Computing (RISC)
microprocessor technology. RISC was invented at IBM, and its inventors built
computers with RISC chips that were “screamingly fast.” IBM subsequently
spent massive amounts of time, money, and manpower trying to make the
RISC chip work in its main line of minicomputers. This required so many
design compromises, however, that the program was never successful. Several
key members of IBM’s RISC team left in frustration, subsequently playing
key roles in establishing the RISC chipmaker MIPS and Hewlett-Packard’s
RISC chip business. These efforts were successful because, having accepted
the attributes of the product for what they were, they found a market, in
engineering workstations, that valued those attributes. IBM failed because it
tried to force the technology into a market it had already found. Interestingly,
IBM ultimately built a successful business around a RISC-architecture chip
when it launched its own engineering workstation. See Charles Ferguson and
Charles Morris, Computer Wars (New York: Time Books, 1994).
8. The notion that non-existent markets are best researched through action, rather
than through passive observation, is explored in Gary Hamel and C. K.
Prahalad, “Corporate Imagination and Expeditionary Marketing,” Harvard
Business Review, July-August, 1991, 81–92.
9. The concept that business plans dealing with disruptive innovations should be
plans for learning rather than plans for executing a preconceived strategy is
taught clearly by Rita G. McGrath and Ian MacMillan in “Discovery-Driven
Planning,” Harvard Business Review, July-August, 1995, 44–54.
10. Jeffrey Thoresen Severts, “Managing Innovation: Electric Vehicle
Development at Chrysler,” Harvard Business School MBA student paper,
1996. A copy of this paper is available on request from Clayton Christensen,
Harvard Business School.
11. Glaub’s remarks were made in the context of the California Air Resources
Board mandate that by 1998 all companies selling gasoline-powered vehicles
in the state must, in order to sell any cars at all, sell enough electric-powered
vehicles to constitute 2 percent of their total vehicle unit sales in the state. As
already noted, the state government, in 1996, delayed implementation of that
requirement until 2002.
12. This statement was made by William Glaub, General Sales Manager, Field
Sales Operations, Chrysler Corporation, at the CARB Workshop on Electric
Vehicle Consumer Marketability held in El Monte, California, on June 28,
1995; see p. 5 of the company’s press release about the workshop.
13. Ibid.
14. It is important to note that these statistics for Chrysler’s offering were
determined by Chrysler’s efforts to commercialize the disruptive technology;
they are not intrinsic to electrically powered vehicles per se. Electric vehicles
designed for different, lighter-duty applications, such as one by General
Motors, have driving ranges of up to 100 miles. (See Jeffrey Thoresen
Severts, “Managing Innovation: Electric Vehicle Development at Chrysler,”
Harvard Business School student paper, 1996.)
15. See, for example, Gabriella Stern and Rebecca Blumenstein, “GM Is
Expected to Back Proposal for Midsize Version of Saturn Car,” The Wall
Street Journal, May 24, 1996, B4.
16. This list of smaller, simpler, more convenient disruptive technologies could
be extended to include a host of others whose histories could not be squeezed
into this book: tabletop photocopiers; surgical staplers; portable, transistorized
radios and televisions; helican scan VCRs; microwave ovens; bubble jet
printers. Each of these disruptive technologies has grown to dominate both its
initial and its mainstream markets, having begun with simplicity and
convenience as their primary value propositions.
17. The notion that it takes time, experimentation, and trial and error to achieve a
dominant product design, a very common pattern with disruptive
technologies, is discussed later in this chapter.
18. This statement was made by John R. Wallace, of Ford, at the CARB
Workshop on Electric Vehicle Consumer Marketability held in El Monte,
California, on June 28, 1995; see p. 5 of the company’s press release.
19. Glaub, statement made at the CARB Workshop.
20. Two excellent articles in which the relative roles of product development and
incremental versus radical technology development are researched and
discussed are Ralph E. Gomory, “From the ‘Ladder of Science’ to the Product
Development Cycle,” Harvard Business Review, November-December, 1989,
99–105, and Lowell Steele, “Managers’ Misconceptions About Technology,”
Harvard Business Review, 1983, 733–740.
21. In addition to the findings from the disk drive study summarized in chapters 1
and 2 that established firms were able to muster the wherewithal to lead in
extraordinarily complex and risky sustaining innovations, there is similar
evidence from other industries; see, for example, Marco Iansiti, “Technology
Integration: Managing Technological Evolution in a Complex Environment,”
Research Policy 24, 1995, 521–542.
CHAPTER ELEVEN
The Dilemmas of Innovation: A Summary
One of the most gratifying outcomes of the research reported in this book
is the finding that managing better, working harder, and not making so many
dumb mistakes is not the answer to the innovator’s dilemma. This discovery is
gratifying because I have never met a group of people who are smarter or work
harder or are as right so often as the managers I know. If finding better people
than these were the answer to the problems posed by disruptive technologies, the
dilemma would indeed be intractable.
We have learned in this book that in their straightforward search for profit
and growth, some very capable executives in some extraordinarily successful
companies, using the best managerial techniques, have led their firms toward
failure. Yet companies must not throw out the capabilities, organizational
structures, and decision-making processes that have made them successful in
their mainstream markets just because they don’t work in the face of disruptive
technological change. The vast majority of the innovation challenges they will
face are sustaining in character, and these are just the sorts of innovations that
these capabilities are designed to tackle. Managers of these companies simply
need to recognize that these capabilities, cultures, and practices are valuable only
in certain conditions.
I have found that many of life’s most useful insights are often quite simple.
In retrospect, many of the findings of this book fit that mold: Initially they
seemed somewhat counterintuitive, but as I came to understand them, the
insights were revealed as simple and sensible. I review them here, in the hope
that they will prove useful to those readers who may be wrestling with the
innovator’s dilemmas.
First, the pace of progress that markets demand or can absorb may be
different from the progress offered by technology. This means that products that
do not appear to be useful to our customers today (that is, disruptive
technologies) may squarely address their needs tomorrow. Recognizing this
possibility, we cannot expect our customers to lead us toward innovations that
they do not now need. Therefore, while keeping close to our customers is an
important management paradigm for handling sustaining innovations, it may
provide misleading data for handling disruptive ones. Trajectory maps can help
to analyze conditions and to reveal which situation a company faces.
Second, managing innovation mirrors the resource allocation process:
Innovation proposals that get the funding and manpower they require may
succeed; those given lower priority, whether formally or de facto, will starve for
lack of resources and have little chance of success. One major reason for the
difficulty of managing innovation is the complexity of managing the resource
allocation process. A company’s executives may seem to make resource
allocation decisions, but the implementation of those decisions is in the hands of
a staff whose wisdom and intuition have been forged in the company’s
mainstream value network: They understand what the company should do to
improve profitability. Keeping a company successful requires that employees
continue to hone and exercise that wisdom and intuition. This means, however,
that until other alternatives that appear to be financially more attractive have
disappeared or been eliminated, managers will find it extraordinarily difficult to
keep resources focused on the pursuit of a disruptive technology.
Third, just as there is a resource allocation side to every innovation problem,
matching the market to the technology is another. Successful companies have a
practiced capability in taking sustaining technologies to market, routinely giving
their customers more and better versions of what they say they want. This is a
valued capability for handling sustaining innovation, but it will not serve the
purpose when handling disruptive technologies. If, as most successful companies
try to do, a company stretches or forces a disruptive technology to fit the needs
of current, mainstream customers—as we saw happen in the disk drive,
excavator, and electric vehicle industries—it is almost sure to fail. Historically,
the more successful approach has been to find a new market that values the
current characteristics of the disruptive technology. Disruptive technology
should be framed as a marketing challenge, not a technological one.
Fourth, the capabilities of most organizations are far more specialized and
context-specific than most managers are inclined to believe. This is because
capabilities are forged within value networks. Hence, organizations have
capabilities to take certain new technologies into certain markets. They have
disabilities in taking technology to market in other ways. Organizations have the
capability to tolerate failure along some dimensions, and an incapacity to tolerate
other types of failure. They have the capability to make money when gross
margins are at one level, and an inability to make money when margins are at
another. They may have the capability to manufacture profitably at particular
ranges of volume and order size, and be unable to make money with different
volumes or sizes of customers. Typically, their product development cycle times
and the steepness of the ramp to production that they can negotiate are set in the
context of their value network.
All of these capabilities—of organizations and of individuals—are defined
and refined by the types of problems tackled in the past, the nature of which has
also been shaped by the characteristics of the value networks in which the
organizations and individuals have historically competed. Very often, the new
markets enabled by disruptive technologies require very different capabilities
along each of these dimensions.
Fifth, in many instances, the information required to make large and decisive
investments in the face of disruptive technology simply does not exist. It needs
to be created through fast, inexpensive, and flexible forays into the market and
the product. The risk is very high that any particular idea about the product
attributes or market applications of a disruptive technology may not prove to be
viable. Failure and interative learning are, therefore, intrinsic to the search for
success with a disruptive technology. Successful organizations, which ought not
and cannot tolerate failure in sustaining innovations, find it difficult
simultaneously to tolerate failure in disruptive ones.
Although the mortality rate for ideas about disruptive technologies is high,
the overall business of creating new markets for disruptive technologies need not
be inordinately risky. Managers who don’t bet the farm on their first idea, who
leave room to try, fail, learn quickly, and try again, can succeed at developing
the understanding of customers, markets, and technology needed to
commercialize disruptive innovations.
Sixth, it is not wise to adopt a blanket technology strategy to be always a
leader or always a follower. Companies need to take distinctly different postures
depending on whether they are addressing a disruptive or a sustaining
technology. Disruptive innovations entail significant first-mover advantages:
Leadership is important. Sustaining situations, however, very often do not. The
evidence is quite strong that companies whose strategy is to extend the
performance of conventional technologies through consistent incremental
improvements do about as well as companies whose strategy is to take big,
industry-leading technological leaps.
Seventh, and last, the research summarized in this book suggests that there
are powerful barriers to entry and mobility that differ significantly from the
types defined and historically focused on by economists. Economists have
extensively described barriers to entry and mobility and how they work. A
characteristic of almost all of these formulations, however, is that they relate to
things, such as assets or resources, that are difficult to obtain or replicate. 1
Perhaps the most powerful protection that small entrant firms enjoy as they build
the emerging markets for disruptive technologies is that they are doing
something that it simply does not make sense for the established leaders to do.
Despite their endowments in technology, brand names, manufacturing prowess,
management experience, distribution muscle, and just plain cash, successful
companies populated by good managers have a genuinely hard time doing what
does not fit their model for how to make money. Because disruptive
technologies rarely make sense during the years when investing in them is most
important, conventional managerial wisdom at established firms constitutes an
entry and mobility barrier that entrepreneurs and investors can bank on. It is
powerful and pervasive.
Established companies can surmount this barrier, however. The dilemmas
posed to innovators by the conflicting demands of sustaining and disruptive
technologies can be resolved. Managers must first understand what these
intrinsic conflicts are. They then need to create a context in which each
organization’s market position, economic structure, developmental capabilities,
and values are sufficiently aligned with the power of their customers that they
assist, rather than impede, the very different work of sustaining and disruptive
innovators. I hope this book helps them in this effort.
NOTES
1. By things I mean barriers such as proprietary technology; ownership of
expensive manufacturing plants with large minimum efficient manufacturing
scales; pre-emption of the most powerful distributors in major markets;
exclusive control of key raw materials or unique human resources; the
credibility and reputation that comes from strong brand names; cumulative
production experience and/or the presence of steep economies of scale; and so
on. The seminal work on entry barriers from an economist’s perspective is
Joseph Bain, Barriers to New Competition (Cambridge, MA: Harvard
University Press, 1956); see also Richard Caves and Michael Porter, “From
Entry Barriers to Mobility Barriers,” Quarterly Journal of Economics (91),
May, 1977, 241–261.
The Innovator’s Dilemma Book Group Guide
The summary and questions in this guide are designed to stimulate thinking and
discussion about The Innovator’s Dilemma, how its findings are manifest in
many industries today, and the implications of those findings for the future.
Thesis of the Book
In The Innovator’s Dilemma, Professor Clayton Christensen asks the question:
Why do well-managed companies fail? He concludes that they often fail because
the very management practices that have allowed them to become industry
leaders also make it extremely difficult for them to develop the disruptive
technologies that ultimately steal away their markets.
Well-managed companies are excellent at developing the sustaining
technologies that improve the performance of their products in the ways that
matter to their customers. This is because their management practices are biased
toward:
Listening to customers
Investing aggressively in technologies that give those customers what they
say they want
Seeking higher margins
Targeting larger markets rather than smaller ones
Disruptive technologies, however, are distinctly different from sustaining
technologies. Disruptive technologies change the value proposition in a market.
When they first appear, they almost always offer lower performance in terms of
the attributes that mainstream customers care about. In computer disk drives, for
example, disruptive technologies have always had less capacity than the old
technologies. But disruptive technologies have other attributes that a few fringe
(generally new) customers value. They are typically cheaper, smaller, simpler,
and frequently more convenient to use. Therefore, they open new markets.
Further, because with experience and sufficient investment, the developers of
disruptive technologies will always improve their products’ performance, they
eventually are able to take over the older markets. This is because they are able
to deliver sufficient performance on the old attributers, and they add some new
ones.
The Innovator’s Dilemma describes both the processes through which
disruptive technologies supplant older technologies and the powerful forces
within well-managed companies that make them unlikely to develop those
technologies themselves. Professor Christensen offers a framework of four
Principles of Disruptive Technology to explain why the management practices
that are the most productive for exploiting existing technologies are
antiproductive when it comes to developing disruptive ones. And, finally, he
suggests ways that managers can harness these principles so that their companies
can become more effective at developing for themselves the new technologies
that are going to capture their markets in the future.
Principles of Disruptive Technology
1. Companies Depend on Customers and Investors for Resources In order to
survive, companies must provide customers and investors with the
products, services, and profits that they require. The highest performing
companies, therefore, have well-developed systems for killing ideas that
their customers don’t want. As a result, these companies find it very
difficult to invest adequate resources in disruptive technologies—lowermargin opportunities
that their customers don’t want—until their customers want them. And by
then, it is too late.
2. Small Markets Don’t Solve the Growth Needs of Large Companies To
maintain their share prices and create internal opportunities for their
employees, successful companies need to grow. It isn’t necessary that they
increase their growth rates, but they
must maintain them. And as they get larger, they need increasing amounts
of new revenue just to maintain the same growth rate.
Therefore, it becomes progressively more difficult for them to enter the
newer, smaller markets that are destined to become the large markets of the
future. To maintain their growth rates, they must focus on large markets.
3. Markets That Don’t Exist Can’t Be Analyzed Sound market research and
good planning followed by execution according to plan are the hallmarks of
good management. But companies whose investment processes demand
quantification of market size and financial returns before they can enter a
market get paralyzed when faced with disruptive technologies because they
demand data on markets that don’t yet exist.
4. Technology Supply May Not Equal Market Demand Although disruptive
technologies can initially be used only in small markets, they eventually
become competitive in mainstream markets. This is because the pace of
technological progress often exceeds the rate of improvement that
mainstream customers want or can absorb. As a result, the products that are
currently
in the mainstream eventually will overshoot the performance that
mainstream markets demand, while the disruptive technologies that
underperform relative to customer expectations in the mainstream market
today may become directly competitive tomorrow.
Once two or more products are offering adequate performance, customers
will find other criteria for choosing. These criteria tend to move toward
reliability, convenience, and price, all of which are areas in which the
newer technologies often have
advantages.
A big mistake that managers make in dealing with new technologies is that
they try to fight or overcome the Principles of Disruptive Technology. Applying
the traditional management practices that lead to success with sustaining
technologies always leads to failure with disruptive technologies,
says Professor Christensen. The more productive route,
which often leads to success, he says, is to understand the
natural laws that apply to disruptive technologies and to
use them to create new markets and new products. Only
by recognizing the
dynamics of how disruptive technologies develop can
managers respond effectively to the opportunities that
they present.
Specifically, he advises managers faced with disruptive technologies to:
1. Give responsibility for disruptive technologies to organizations whose
customers need them so that resources will flow to them.
2. Set up a separate organization small enough to get excited by small gains.
3. Plan for failure. Don’t bet all your resources on being right the first time.
Think of your initial efforts at commercializing a disruptive technology as
learning opportunities. Make revisions as you gather data.
4. Don’t count on breakthroughs. Move ahead early and find the market for
the current attributes of the technology. You will find it outside the current
mainstream market. You will also find that the attributes that make
disruptive technologies unattractive to mainstream markets are the
attributes on which the new markets will be built.
Questions for Discussion
1. The characteristics of a disruptive technology are:
They are simpler and cheaper and lower performing.
They generally promise lower margins, not higher profits.
Leading firms’ most profitable customers generally can’t use and don’t
want them.
They are first commercialized in emerging or insignificant markets.
The Innovator’s Dilemma discusses disruptive innovations in the diskdrive, excavator, steel, and auto industries. Looking back through history,
can you identify some disruptive technologies that eventually replaced
older products and industries? Can you think of others that are emerging
today, maybe even ones that could threaten your business?
2. There is a tendency in all markets for companies to move upmarket toward
more complicated products with higher prices.
Why is it difficult for companies to enter markets for simpler, cheaper
products? Can you think of companies that have upscaled themselves out of
business? How might they have avoided that?
3. The same tendency for companies to move upmarket that can be fatal for
established companies also accounts for the eventual development of
emerging markets into mainstream markets. Besides the examples in the
book, can you think of companies that have upscaled themselves to
success?
4. In attempting to commercialize a disruptive technology, why is it important
to begin investing on the assumption that your expectations will be wrong?
Besides the motorcycle, excavator, and disk-drive examples in the book,
can you think of
other examples in which a company began marketing a product for one
application but the big market turned out to be for another application?
5. One of the hallmarks of disruptive technologies is that initially they
underperform the current technology on the attributes that matter most to
mainstream customers. The companies that succeed in commercializing
them, therefore, must find different customers for whom the new
technology’s attributes are most valuable. Can you think of any markets
that are emerging today based on attributes or qualities that seemed
unimportant to the mainstream markets when they were introduced? What
older, mainstream products or companies are threatened?
6. When two or more products meet the minimum specifications for the
functionality of a product, customers begin to look for other deciding
factors. According to a Windermere Associates study cited in the book, the
progression usually is from
functionality to reliability to convenience to price. What are some current
markets that have recently moved one or more steps along this progression?
7. Most people think that senior executives make the important decisions
about where a company will go and how it will invest its resources, but the
real power lies with the people deeper in the organization who decide which
proposals will be
presented to senior management. What are the corporate factors that lead
midlevel employees to ignore or kill disruptive technologies?
Should well-managed companies change these practices and policies?
8. What are the personal career considerations that lead ambitious employees
in large corporations to ignore or kill disruptive technologies? Should wellmanaged companies change the policies that encourage employees to think
this way?
9. What do the findings in this book suggest about how companies will be
organized in the future? Should large organizations with structures created
around functionalities redesign themselves into interconnected teams, as
some management theorists
currently believe? Or, recognizing that different technologies and different
markets have differing needs, should they try
to have distinct organizational structures and management practices for
different circumstances? Is this realistically possible?
10. The CEO of a disk-drive maker is quoted in chapter 4 as saying that “We
got way ahead of the market” in explaining why his company failed to
commercialize a 1.8-inch disk drive that it had developed. At the time,
however, there was a burgeoning market for 1.8-inch drives among new
users that his company hadn’t discovered. Professor Christensen argues that
“disruptive
technology should be framed as a marketing challenge, not a technological
one.” Do you think there is a market somewhere for
all technologies? If not, how would you as a manager go about figuring out
which technologies to shelve and which ones to
pursue aggressively?
11. Similarly, Professor Christensen argues that companies should not wait for
new breakthroughs to improve a technology’s performance. Instead, they
need to find customers who value the very attributes that others consider to
be shortcomings. As
a manager, how do you decide when a technology—or idea—needs more
development and when it’s time to aggressively put it on
the market?
12. The primary thesis of The Innovator’s Dilemma is that the management
practices that allow companies to be leaders in mainstream markets are the
same practices that cause them to miss the opportunities offered by
disruptive technologies. In other words, well-managed companies fail
because they are well managed.
Do you think that the definition of what constitutes “good management” is
changing? In the future, will listening to customers, investing aggressively
in producing what those customers say they want, and carefully analyzing
markets become “bad management”?
What kind of system might combine the best of both worlds?
About the Author
Clayton M. Christensen is the Kim B. Clark Professor of Business
Administration at Harvard Business School. In addition to his most recent book,
How Will You Measure Your Life?, he is the author or coauthor of many
critically acclaimed books, including several New York Times bestsellers—The
Innovator’s Dilemma, The Innovator’s Solution, and most recently, Disrupting
Class. Christensen is the cofounder of Innosight, a management consultancy;
Rose Park Advisors, an investment firm; and the Clayton Christensen Institute
for Disruptive Innovation, a nonprofit think tank. In 2011 he was named the
winner of the global Thinkers50 Innovation Award.